SWEDEN – Despite the good progress of the Swedish state pension buffer funds, AP1-4 and 6, since their re-launch at the beginning of the year, there is still room for improvement within tactical asset allocation (TAA), custody strategy and issues over bias to Swedish equities in the investment strategies of the funds, according to a study by consultants William M. Mercer for the Swedish Ministry of Finance.
Even though the AP funds have quickly turned to external managers to complement in-house expertise, the case for tactical asset allocation has not been issued properly, says the report. The authors, Divyesh Hindocha and Johan Sidenmark at Mercer, argue that the AP fund managers should consider the benefits of tactical asset allocation since many in-house pension fund teams around the world benchmark their approaches with external TAA managers.
While the report does not closely review the tendency among the AP funds to use domestic custodians, it still suggests that the risk and compliance services provided by global custodians are under-utilised.
The authors of the study also urge the AP fund managers to consider the widest possible investment opportunities, noting that a number of the fund strategies have a bias to the Swedish equity market on the grounds of a link to wage growth.
The public authority status of the funds does not help at this point, says the report:
“ A particular aspect of this is the somewhat uncertain mandate of AP6, which in limiting its private equity investments to Sweden, might imply a social responsibility to assist Swedish start-ups whatever their merits.”
The report concludes with a suggestion to introduce some economic measures to supervise the AP fund mandates.
“ This implies the active monitoring of internal versus external asset management, but also the bottom line of the funds themselves,” say the authors of the study.
The returns of AP funds are either in line with their benchmarks or have outperformed them both in the short term and in most cases in the long-term as well, according to a Swedish ministry of finance report. The best performing fund last year was the then combined portfolio of AP funds one and two, which returned 8.9%, due to the fact that the portfolio was mainly exposed to fixed income.