SWEDEN - Swedish pension buffer AP1 is planning to allocate more of its assets to alternatives as part of its long-term reforms, even though this asset class generated a negative return in 2009.

Details of Första AP-fonden's annual report 2009 confirmed the Swedish buffer fund generated a total return of 20.2% last year after expenses, led in the main by equity gains, and countering losses in alternative investments.

Its 5% holding in alternatives through real estate, private equity, hedge funds and opportunity investments generated an overall return of -3.4% or a loss of SEK300m (€30.78m) by the end of 2009, largely because the bulk of holdings were in unlisted real estate equities and private equity funds, while currency risk took its toll too.

Specific losses on real estate are not revealed but private equity is said to have lost 13% on investments while hedge funds actually gained 33% on holdings.

However, Johan Magnusson, managing director of AP1, said in his yearly review the fund is likely to diversify its risk further by increasing its allocation to alternative investments.

"In 2010, we will continue to work on spreading the risks in the portfolio while taking advantage of investment opportunities that may arise, in part by increasing our positions in alternative investments," said Magnusson. "Such investments often have yield patterns that can contribute to more consistent returns over the years."

AP1 announced last year it was changing its investment model to place greater emphasis on strategic asset allocation, as part of a move to reduce risk and volatility in the fund, and reduce costs to its targeted cost saving of at least SEK100m.

While the changes were designed to cut the risk profile of the fund, the long-term view, said Magnusson, is the market outlook is still somewhat limited.

"We based these portfolio decisions on our positive market outlook in the short-term. On a somewhat longer time horizon, however, our projections are not as positive," stated Magnusson in his annual review.

"In our judgment, the return on most assets will fall short of historical averages because many of the economies in the Western World are expected to achieve relatively modest growth because of the financial crisis," he added.

AP1 is aiming to deliver an average annual return after expenses of 5.5%, to minimise its automatic balancing mechanism as much as possible.

A small contribution to the return last year would have come, according to the annual report, from its activity in class actions too. AP1 has been involved in a number of class action suits against North American companies and gained SEK40m through such activity last year, to reach SEK53m since 2006.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com