SWEDEN - Sweden's AP1 has significantly reduced its exposure to equity in the first six months of 2011, shifting 5% of assets away from the stock market to fixed income.

It also altered the fund's organisational structure, creating the position of chief investment officer, with current managing director Johan Magnusson taking on additional responsibilities.

One of the country's five buffer funds, Första AP Fonden saw the strongest performance between January and June from its alternative investment portfolio, which returned 7%.

Emerging market equities fared less well, losing 6%, while Swedish equities lost 0.2% in the first half of the year.

However, due to stronger returns of 4% on its North American, European and Pacific holdings, the equity portfolio still managed to return 0.7%, while fixed income grew by 2.8%.

Despite this, AP1's returns were the worst of the buffer funds, with AP3 and AP4 both returning 1.6%, while AP2 returned 2.3% over the same period.

The fund also altered its investment strategy, scaling back equity holdings by SEK11bn (€1.2bn) - accounting for 8.8% of the scheme's investments in equity at the end of 2010 - and shifting these funds into fixed income, increasing the portfolio by more than 13% compared to December.

Explaining the change, Magnusson said both sovereign debt problems in the euro-zone and US would result in long-term adaptation that came with "serious risk" and that these concerns - as well as rising commodity prices and high inflation in developing countries - had led the scheme to re-evaluate its risk approach.

"After the mid-year shift, market development has been significantly weaker and thereby confirmed our fears," he said.

The fund's half-yearly report said net assets under management had risen to SEK221.6bn, but admitted that market volatility seen in the months since the end of June had led to a drop in its investment value.

"However, this impact has been limited by the fund's reduction of its equity exposure in the first half of the year," the report added, noting a 53.6% exposure to stocks, down from more than 60% in December.

Magnusson signalled a further shift in investment strategy, saying the fund was considering increasing its exposure to real assets - echoing comments by AP1's head of ESG Ossian Ekdahl to IPE earlier this year.

He said following a detailed survey on climate change by consultancy Mercer and more than a dozen institutional investors, including AP1, the fund had recognised the "necessity" in investing in real assets, such as real estate, agricultural and timberland, as well as infrastructure. 

The managing director further welcomed the "transparent, constructive and fact-based analysis" of the AP system by the ministry of finance, which the government warned could lead to the closure of two schemes.

"It is positive that the Swedish government is now launching an inquiry into the rules governing the AP funds," Magnusson said.

"Today, there are many reasons to evaluate how the funds can best ensure the security of current and future pensions."