SWEDEN - AP1 has reduced its equity exposure by a further 10% and increased investments in alternative assets in the six months to June, with the Swedish buffer fund seeing returns increase to 4.5% over the period.

According to its half-yearly report, the fund has successfully allocated almost all of the SEK10bn (€1.1bn) earmarked for alternatives, with hedge funds taking the largest share of the assets.

Managing director Johan Magnusson said earlier this year the fund would seek to de-risk its equity portfolio after suffering losses of nearly 10% over the course of 2011.

Since the end of the year, equity exposure has decreased from nearly 50% of the scheme's total of SEK221bn in assets to 45%, previously accounting for 60% of all investments.

AP1 produced substantially higher returns over the first six months to June than at either the end of last year or June 2011.

Returns increased from 1.4% to 4.5% year-on-year and recovered from a loss of 1.9% in December.

Boosting assets by SEK9.7bn, the buffer fund was able to report assets in excess of 2010's peak, with the return resulting in growth over a rolling 10-year period of 5.7%, outperforming its target.

Describing the results as "satisfying", Magnusson said: "Our return was also good in view of the current market conditions and the investment rules we are bound by."
Its increased investment in alternatives, boosting exposure by 4 percentage points to 13.3%, has also resulted in an increased reliance on external managers, contrasting with Magnusson's stated desire to bring more asset management in-house.

As a result of the hedge fund mandates, external managers now oversee 44% of the fund's assets, up from 41% at the end of the year.

Asked about the conflict between policy and actions, Magnusson told IPE AP1's plan was to "increase internal management over time" for the alternatives portfolio.

He further ruled out investment in infrastructure.

"The investment guidelines for the AP funds are conservative, and we have problems getting infrastructure into the mandate," he said.

The buffer fund system was recently subject to a review that recommended the abolition of two of the five main buffer funds, as well as the creation of the board that would be charged with setting investment guidelines - a shift away from prescriptive regulation towards a prudent person principle.

Discussing AP1's investment in real estate, Magnusson that while the pace of investment from its subsidiary Cityhold, a joint venture with AP2, was slow, this did not bother him.

"We do not need to get it all invested at once," he said. "We would like to buy what we like."