SWEDEN - The SEK212.2bn (€23bn) Swedish buffer fund, AP3 wants more freedom to invest in private equity.

The fund posted a return after expenses of 9.5% for 2006, almost half the previous year's record of 17.7%. Weaker returns from equity and bond markets were offset by very good returns from private equity and real estate of 22.5% and 38% respectively.

Under current Swedish regulations the AP funds can only have indirect exposure to private equity via funds and total allocation is capped at 5%. As infrastructure investments are currently counted as private equity AP3 told IPE that it thinks the maximum exposure is "too low".

AP3 would like to see the government change this part of the AP funds' investment rules in the course of this year. "If not, there is a major risk that the AP funds will lose ground in the competition for new investment opportunities," the fund stated its 2006 annual report.

It stressed that the review should only cover investment regulations and not aim to alter the pension system in any other way.

This year will see an overhaul of the fund's real estate portfolio which currently consists of a sole holding in AP Fastigheter. In December, AP3 appointed Aberdeen Property Investors to build a European and Asian real estate equity fund portfolio.

There are also discussions to invest in the US, a mandate which might be awarded to another manager in the future, the fund said. "Our goal is to invest half of our real estate portfolio in the future in international real estate," a spokeswoman confirmed.

The real annualized return on all assets since 2001 is now up to 4.2%, for the first time exceeding its long-term target of 4% per year. However, looking at 2006 alone, AP3's listed assets missed their benchmark by 0.2 percentage points.

Currently the fund has short-listed several mangers for a global tactical asset allocation mandate of as yet undisclosed size and it is seeking to appoint manager for a global enhanced indexing mandate.