Investment strategy and objectives

AP3’s core task is to create value in the Swedish public pension system alongside the other AP Funds.

AP3’s objectives

The objective of AP3’s asset management, as determined by the Board, is to create a real annual return of 4% in the long term. AP3 has been able to establish this real return target by analysing the pension system. This target strikes a healthy balance between stability in the pension system in the long term (for future pensioners) and the risk of a decline in the value of the Fund’s wealth in the short term (current pensioners).

The Fund’s adopted management strategy is based on AP3’s mission and our hallmarks, coupled with AP3’s philosophy – our view of the financial market’s workings.

AP3’s mission

AP3’s overarching mission is to manage the fund capital in the best interests of the income pension system by generating high returns at low risk. This allows the Fund to live up to its two core roles in the pension system: to serve as a buffer in the event of an imbalance in inflows and outflows in the system, and to help create stability in the pension system.

Our philosophy

AP3’s management philosophy is based on generally accepted principles in modern asset management and defines the Fund’s conviction of how the financial markets work and how value is created.

Risk taking	Over time, risk taking in the financial markets generates positive returns
Forecasting ability	The return and risk of financial assets can be assessed using structured analyses
Risk diversification	Risk-adjusted returns can be increased by taking diversified risks
Time diversification	Combining investment decisions with a long, medium and short term investment horizon yields high risk-adjusted returns, thus increasing the probability of achieving return targets

Our hallmarks

Long-term approach – Many managers currently lack the ability to take a long-term approach since short-term assessment horizons encourage a focus on short-term developments. The long-term approach that AP3 can capitalise on enables us to engage in counter-cyclical activities. A long-term approach reduces the uncertainty of “timing” and allows for gradual portfolio shifts toward the levels of risk and risk premiums that are believed to strike a healthy balance between risk and return.

Flexibility – AP3 has the ability to act based on changing circumstances and to implement changes when necessary. AP3’s organisation is based on a close connection between management and other facets of the organisation. This flexibility also helps promote continuous progress in AP3’s approach.

Reputation as an asset manager – The Fund’s approach, history, its ownership by the state and Swedish home-front makes the Fund an attractive business partner. This dynamic gives us a competitive edge over many other operators in the financial markets. Over time, AP3 has developed specific areas of expertise that now comprise the foundation of our operations. Key areas of expertise include alpha/beta separation, the procurement of external management and management of unlisted assets.

Economies of scale – From an international perspective, AP3 is large enough to conduct effective asset management operations.

Investment strategy

AP3’s strategy is geared to achieving the Fund’s absolute annual target of a 4% real return over time. This entails composing a diverse portfolio of assets capable of achieving the target return at a reasonable level of risk, and managing and developing the portfolio so as to adapt the risk to the prevailing circumstances.

	Long term	Medium term (strategic)	Short term (tactical)
Risk	Risk via exposure predominantly to equity, credit, currency, and liquidity risks	Risk changes depending on return expectations over coming 1-3 years	Risk that creates a return with a low covariance with other AP3 returns
Forecasting ability	Structural macroeconomic analyses and return forecasts based on long-term data	Economic analyses from macroeconomic perspective, and valuation and risk propensity	Various types of decision-making models and forecasting methods for short-term positioning
Risk diversification	Among various asset types and among various regions and sectors	Changes in exposure to various risk types and diversification via positions in various submarkets	Positions taken in several sub-segments of the financial market

AP3 maintains an asset management department with clearly defined roles and areas of responsibility. Decisions are taken in order to maximise our ability to deliver profitable and cost-effective asset management over time. We use structured monitoring and rigorous risk management to ensure that this decentralised decision-making model works successfully.

Risk diversification

The Fund’s investment strategy is based on processes and structures that must be sustainable with the aim of generating a healthy return. This encompasses risk diversification, which is prioritised in our investment strategy.

Through successful investments, AP3 is committed to contributing to both long and short-term stability in the pension system. This is achieved if the return on capital exceeds the average wage increase in the country, and if the Fund can avoid major losses in periods of financial uncertainty.

AP3 – an investment that makes a difference.

Since its inception in 2001, AP3 has maintained an average annual nominal return of 5.4%. This can be compared with an average annual nominal wage increase of 3.1%. AP3 and the other buffer funds have thus enhanced stability in the pension system over the past 14 years, and increased the probability that future pensions can grow in line with wages in Sweden.

The portfolio

The portfolio comprises listed assets (equities and bonds), and alternative investments such as private equity, real estate, infrastructure, timberland and insurance risks. In addition, there is a portfolio comprising absolute return strategies that encompass internal and external hedge funds, as well as risk premium strategies. By investing in a global portfolio comprising listed assets, alternative investments and absolute return strategies, AP3 has created a portfolio that is more robust in periods of financial uncertainty than a traditional portfolio consisting exclusively of listed equities and bonds.

Focused on our target

Enabling successful investments requires us to formulate our commitment to the pension system as a clear target. Based on our mandate from the National Pension Insurance Funds Act, we work to an annual percentage return target that establishes a clear marker for our portfolio management.

This target also serves as a form of guidance in selecting our investment strategy. By performing detailed analyses on the pension system, AP3 has been able to establish a 4% annual real return target. This target strikes a healthy balance between long-term stability in the pension system and the risk of short-term falls in fund value. The target is framed in real terms, meaning that it is adjusted for inflation, since the objective is to guarantee pensioners’ purchasing power.

AP3 has a core mission within the Swedish pension system. The assets the Fund manages belong to the Swedish public and are for the use of current and future pensioners.