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Semi-annual report 2002

Total return –7.4 per cent during first half of 2002.

Due to the sharp downturn in the equity market, the Third Swedish National Pension Fund (AP3) reports a return of –7.4 per cent (adjusted for net capital flows) during the first half of 2002, equivalent to SEK –10.1 billion.

On June 30, the market value of AP3’s fund capital amounted to SEK 126.6 billion (including a net capital inflow of SEK 4.1 billion), compared to SEK 132.7 billion at the beginning of 2002. The Fund outperformed its benchmark portfolio by 0.3 percentage points (before expenses), equivalent to SEK 300 million .

“It is always painful to report negative returns. But I regard our positive relative performance of 0.3 percentage points as a satisfactory result. If we succeed in generating SEK 300 million better returns than our benchmark during every half year, both in good and bad times, this will make a sizeable contribution to the pension system. Our outcome during the first half of 2002 must be judged in relation to our long-term mandate over a period of 30–40 years,” says Tomas Nicolin, CEO of AP3.

The proportion of equities in the Fund’s reference portfolio is 55 per cent. Given the sharp downturn in the equity market, this explains the negative absolute return on our portfolio during the first six months of 2002. The reference portfolio is decided on the basis of an ALM-analysis of the Fund’s commitments in the Swedish pension system. AP3’s reference portfolio includes 55 per cent equities, 37 per cent interest-bearing assets and 8 per cent real estate.

New corporate governance policy
The Fund also announces its new corporate governance policy. This policy document addresses issues that the Fund will pursue in its role as an institutional shareholder, with the aim of strengthening shareholder influence and contributing to the Fund’s overall return target. The policy document discusses the Fund’s demands for a clearer division of roles between corporate managements and board of directors, as well as its views concerning stock option programmes.

“We recommend a clear link between performance and reward, preferably tied to the company’s relative performance in relation to its competitors. We also believe that expensing stock option programmes directly in operating income would be an important step towards ensuring that a company’s reported earnings reflect its real earnings,” Mr Nicolin says.