Absolute return on investment
The return generated on a portfolio or portfolios of assets, measured in kronor or percent, of the original invested amount.
Asset management adopts deviations from the benchmark index to add value. The result is reported as active return.
Active management: Asset management adopts deviations from the benchmark index to add value.
Passive management: Asset management strives for a return equal to the benchmark index.
Alpha and Beta
Alpha: A positive Alpha value is the additional return the investor gains as a reward for having taken a greater risk than merely following the market as a whole, via normal index. A positive Alpha return therefore means that the Fund has beaten its index.
Beta: Beta simply describes market exposure. Exposure to different markets is determined by the composition of the strategic portfolio.
Asset Liability Modelling. An analytical model used to determine the Fund’s strategic portfolio. The study, which is revised on a continual basis, is designed to determine the optimal composition for the different classes of asset under Fund management, to ensure that it satisfies the Fund’s long-term commitment to the collective requirements of the Swedish national pension system. The judgements based on this analysis shall take into account demographic change as well general economic trends.
The index that constitutes the Second AP Fund’s strategic portfolio, against which the Fund’s management performance is measured.
Credit risk and counterparty risk
Credit risk: refers to the risk that an issuer may become insolvent or be awarded a lower credit rating.
Counterparty risk: refers to the risk that the other party may be unable to meet its business obligations.
The yield difference arising from the difference in creditworthiness between two otherwise comparable bonds.
A mandate that is limited and specific to a single investor. The alternative to discretionary management is traditional fund management.
A measure of interest risk that yields an assetrelative change in value with an interest adjustment of one percentage unit.
Mandate managed at a low level of risk to reflect index, driven by quantitative models.
Fair value is defined as the amount for which an asset may be transferred or a debt settled, between parties who are mutually independent and who have a vested interest in completing the transaction. Normally speaking, this means that listed assets are valued at the buying-rate (market value) and that the fair value of unlisted assets is estimated with the help of generally accepted valuation models.
A derivative instrument involving a contract to purchase a currency at an agreed future date at a predetermined rate of exchange.
Global Tactical Asset Allocation mandate. A mandate that applies a TAA strategy on a global basis.
Contributions to the overall return that derive from implementation of the strategic portfolio and index switches.
The forecast volatility of an asset class.
A gauge of risk-adjusted relative return. Measured as relative return, divided by tracking error/active risk.
A contract between two counterparties, in which one interest flow is exchanged for another. Normally, the undertaking given by one party to pay a fixed rate of interest is exchanged for the other party’s undertaking to pay a floating rate of interest.
International Private Equity and Venture Capital.
International Swaps and Derivatives Association. An ISDA contract is a standard contract for the regulation of trading in derivatives between two counterparties.
Liquidity risk refers to the risk that securities cannot be converted into cash, because of reduced access to or demand from the market, which either precludes the purchase or sale of such securities, or would require their sale at a loss.
The market risks most relevant to the Second AP Fund are share-price risk, interest-rate risk and currency risk.
International equity indicies managed by Morgan Stanley Capital International.
Operative risk refers to the risk that an error or stoppage in operations could lead to economic loss or reduced credibility.
Portfolio management that focuses on exposing incorrect market pricing with the help of a mathematical model.
Portfolio return compared to return on Fund’s strategic portfolio. The return is cleared of commission and operating costs.
Standard & Poor’s 500 composite index. A capweighted index of 500 American companies, selected on the basis of a number of different
factors, including size, liquidity and industrial sector.
A gauge of risk-adjusted return. Measured as the portfolio’s absolute return less risk-free interest, divided by the standard deviation on absolute return.
Six Return Index: a cap-weighted share index, reflecting average growth on the Stockholm Stock Exchange, including dividends.
The Second AP Fund’s strategic portfolio is determined by the Board of Directors and defines the Fund’s strategic asset allocation.
Tactical Asset Allocation. An active management strategy focused on overperformance in diverse asset classes.
Tracking error/Active risk
The variation in relative return. Often measured as standard deviation on the relative return.
Value at Risk, VaR
A measure of risk that indicates the maximum loss, based on a given confidence level, that a portfolio may incur over a given period. VaR is
normally calculated at a confidence level of 95 percent, and a ten-day interval.