More capital than ever
At the close of the year, we can state that the Second AP Fund's capital assets have never been greater. With a return of no less than 13.5 percent and fund capital amounting to SEK 241.5 billion, in spite of the continued turbulence on financial markets, we have demonstrated that our long-term strategy is working well. We shall continue with our systematic commitment to the build-up of a diversified and international portfolio, focused on the generation of a long-term return at balanced risk.
I am very proud of the way the Second AP Fund is handling its share of the national pension system's buffer capital. This longterm and systematic process, summarized in a partially revised strategy just over five years ago, is having an increasingly obvious impact. We are diversifying the portfolio and investing in new markets and asset classes. We are moving from listed to unlisted holdings, we choose to operate with partners rather than invest in funds and are increasing our exposure to markets that offer the best growth potential.
In 2012, this strategy generated a result of SEK 28.6 billion, corresponding to a return of just over 13 percent. This is in line with the level of growth on the Stockholm Stock Exchange – often used in comparison. In fact, on the one hand, just 11 percent of the Fund's capital is invested in Swedish equities and, on the other, as per our investment regulations, 30 percent of fund capital must be invested in fixed-income securities. Generally speaking, the percentage of Swedish assets in the portfolio has been reduced steadily. This is entirely reasonable, given the fact that the Swedish economy accounts for a mere 0.8 percent of combined global GDP, and that 90 percent of the national pension system is already exposed to the Swedish economy in the form of the contribution assets. Today, more than 40 percent of our capital is invested outside Europe. During the year, we increased our investments in private equity funds, foreign commercial real estate and forest-and-agricultural real estate. Furthermore, we have invested in alternative risk premiums, a new asset class featuring low risk and low correlation to the equities market. Investments in more complex markets and assets often cost a bit more. But the important thing is that we generate a risk-adjusted net return (i.e. a return after the deduction of administrative expenses) which outperforms more traditional investments. The performance of our actively managed portfolio clearly demonstrates the efficacy of this approach. During 2012, our active investment strategies generated an additional 1.2 percent – or SEK 2.1 billion – in revenue.
Buffer Fund Inquiry
"Sweden's pensioners deserve better!" This is the essential content of our response to the Swedish Government Buffert Fund Inquiry, which we submitted at the end of November. We feel there is potential for improvement with respect to the relaxation of investment regulations and in more clearly defining the way funds are monitored. Admittedly, these points were touched on in the report, but many parts suffered from serious weaknesses and in some cases appeared to be based on loose assumptions. Implementing such comprehensive change as that proposed would involve significant cost as well as risks and uncertainty, and the justification for such change is neither clear nor convincingly argued in the report. The idea that consolidating the management of pension assets in fewer funds will generate economies of scale lacks support in scientific research. The reverse, in fact. Research suggests that the reduction in costs that derives from increased size is nowhere near enough to counteract the negative consequences of such economies when managing an even larger volume of capital. It is also difficult to understand the argument that such consolidation would provide access to greater competence and simplify cooperation with major global investors. Today, the Second AP Fund has some of the market's foremost specialists and operates through a network of key global investors, conducting joint investment on markets and in asset classes the world over.
It is sad that such a flawed report risks defining the agenda for the debate. The fact is that Sweden has a highly robust pension system, which many wish to emulate. Furthermore, through our global network, we know that many of the world's largest funds are actively engaged in discussions as to how their operations can best be reorganized into several elements to ensure that they function better. We can be proud of what we have already, but must naturally continue to strive for ongoing improvement.
Responsible investment process
One area in constant focus is our sustainability programme. We have both the expertise and the know-how needed to participate and promote improvements in sectors such as the environment, ethics and corporate governance. This work forms an important and integrated part of our investment process. We have been involved in establishing Principles for Responsible Agricultural Investment and, in partnership with some of the world's largest private equity companies, have placed the spotlight on ethical and environmental issues. Now, as the first Swedish player to be granted a licence for direct investment in domestic Chinese equities, we are joining regional networks to enable us to play an active part in promoting corporate governance issues in Chinese companies.
Our primary and most important task is to build up a portfolio that can be adapted to all generations. Our vision of the country's long-term development with respect to employment, demography and wage levels naturally affects our current investment strategy. Our solid performance in 2012 means that we are now in line with our long-term commitments. Our strategy for achieving a solid return with balanced risk, through greater diversification, is proving increasingly successful. This would have been impossible without the profound commitment and competence of those who work at the Second AP Fund – and who strive for its consistent improvement. All to generate the best possible return for Sweden's pensioners!
Eva Halvarsson
CEO