Asset management strategy

Maximizing return on assets while maintaining a low level of risk is central to the AP funds’ mission. Investment strategy shall take into account the impact of pension disbursements and the payment reserve necessary to cover outflows from the funds. The strategic benchmark represents the mix of different assets classes that the Second AP Fund believes will generate the best long-term growth in pension values.

The Second AP Fund uses an Asset-Liability-Model (ALM), developed in-house, to forecast how the pension system is likely to develop over the long term and the extent to which the Fund’s portfolio selection is expected to affect the balancing of the national pension system. In concrete terms, this means that the Fund’s long-term investment focus is determined with a view to avoiding, as far as possible, activating the ‘brake’.

 The assumptions made concerning demographic and general economic development are thereby decisive in determining the Fund’s long-term investment focus. The performance profiles of the investment assets the Fund considers when composing its strategic benchmark are also highly significant.

 The Second AP Fund’s ALM analysis reveals that a relatively high long-term return is necessary if the goals established for its asset management activities are to be attained. In practice, therefore, this means that a large part of the Fund’s capital will be invested in high-risk assets, such as equities and credit bonds. Given the present low interest rates, the return on low-risk assets – such as government securities – will not be adequate to attain the goals established for the Fund’s investment activities.

 Recent years have typified the episodic progress that marks financial markets in the long term. The Second AP Fund therefore seeks to increase the dynamic element in its strategic benchmark, to adjust the level of risk adopted in relation to long-term market prospects.

 Portfolio diversification is a crucial factor in composing a strategic benchmark. Nevertheless, a globalised economy and the closer integration of international financial markets make traditional diversification more problematic. New sources of return may instead be found in investment areas that lie outside traditional quoted asset classes. The Second AP Fund is engaged in an ongoing evaluation of opportunities for investing parts of the portfolio in such alternative areas.