Swedish state pensions buffer fund AP1 made a defensive shift in the first half of this year, reducing its equity exposure and increasing the fixed income allocation to protect its portfolio from the risk of weakening markets.
In its financial report for the first half of this year, the fund reported a 2.5% return on investments, compared to the 9.6% return achieved for the whole of 2017.
Johan Magnusson, chief executive of the Stockholm-based fund, said in the report: “[AP1] has taken small steps in the first half of the year towards a somewhat more defensive portfolio orientation.”
There were no big shifts, he said, but the changes made indicated that AP1 recognised the current late stage of the economic cycle and the fact that the risks of a weaker market trend had increased.
Magnusson also warned against focusing too much on the pension fund’s short-term investment performance.
“Sometimes the world outside has expectations that the AP funds should immediately take action solely against short-term losses,” he said.
“This risks reducing the opportunities for decision makers on all levels in management organisations to exploit one of our most important comparative advantages – our ability to act long-term,” Magnusson said.
Equities produced a 1.9% profit overall for AP1 in the first half, with Swedish shares returning 6.2%. However, emerging markets shares made a 0.7% loss.
Fixed income investments made a 0.1% loss.
Real estate, however, made a 7.5% return, and infrastructure gained 2.5%.
Venture capital funds generated 8.2% in the period, but hedge funds ended June with a 4.2% loss over six months.
Between January and June, AP1’s exposure to equities slimmed to 35.7% of its portfolio from 37.9%, while fixed income securities grew to 33.7% from 31.7%.
Within equities, the pension fund’s allocation to emerging markets equities increased slightly to 14.7% from 14.2%, while the allocations to both Swedish and developed markets equities were reduced.
Total assets increased to SEK337.5bn (€32.9bn) by the end of June, from SEK332.5bn at the end of December 2017, after SEK3.3bn was transferred to the pension system.
Magnusson said the new set of investment rules governing the four main AP funds, due to come into force on 1 January next year, would improve the funds’ conditions for being able to reach their return target.
This was the first step in the modernisation of the investment guidelines, he said.
“It is now important that the next step is taken, which will define the opportunities for direct investments in unlisted assets such as infrastructure companies, illiquid credit and joint investments in unlisted companies,” he said.