AP2, the second of Sweden’s national pensions buffer funds, has created a pair of multi-factor indices to guide its internally-managed global equities investment, in a bid to improve returns and take more account of environmental, social and governance matters (ESG).

Publishing its 2017 annual report, the pension fund reported a return on its total portfolio of 9.1% last year, compared to 10.5% in 2016. This excludes commission fees and operating expenses.

Eva Halvarsson, chief executive of the Gothenburg-based pension fund, said the fund had been working “intensively” in the area of sustainability in 2017.

“An important step in integrating sustainability as part of the investment decisions is that we have continued to implement ESG in the global equities asset class in our internal quantitative management,” she said.

“During 2017, we designed two new so-called multi-factor indices where ESG is the most important factor for the weighting in the indices,” Halvarsson said.

The indices are for AP2’s internally-managed global equities, which make up 29% of the overall portfolio, or SEK99bn (€10bn). One index is for developed markets equities and the other for emerging markets.

To be introduced this year, they include all the factors AP2 seeks exposure to as well as ESG factors, and will replace the six indices the fund currently uses for this part of its portfolio.

Claes Ekman, quantitative portfolio manager at the buffer fund, said: “Our new index has many benefits for today’s and tomorrow’s pensioners.

“It has a better expected expected absolute and risk-adjusted return, lower costs and also takes ESG into account in the investment process to a higher degree,” he said in the annual report.

Meanwhile, among asset classes, AP2 reported that Swedish equities generated an 11.3% return in 2017, while developed markets equities returned 10.7% and emerging markets equities gained 20.6%.

Foreign government bonds and foreign corporate bonds lost 2.3% and 1.7%, respectively, while investments in Swedish bonds generated a return of 0.6%.

Alternative investments, meanwhile, returned 9.5%, down from 2016’s 13.5%.

The fund’s assets under management ended the year totalling SEK345.9bn, up from SEK324.5bn at the end of 2016.

AP2 had net outflows of assets into the national pension system of SEK7.4bn last year, up from SEK6.6bn the year before.

Halvarsson said that the pension fund had experienced increased costs in its supply chain in 2017, but that overall costs remained low despite this.

“The way we deal with this is to manage more and more internally and continue to develop our activities in a cost-effective way,” she said.

Operating expenses fell to 0.06% of asset management costs, AP2 reported, down from 0.07% the year before.