SWEDEN - Tredje AP-fonden (AP3), the third Swedish national pension fund, saw its fund capital fall SEK17.3bn (€1.8bn) in the first half of this year, as a result of "turbulent and weak conditions on financial markets".
Interim figures from the pension buffer fund showed the fund capital had dropped from SEK224.9bn to SEK207.6bn, as investment returns generated a loss of SEK17.9bn, equivalent to -8%.
The report revealed the global economic situation had resulted in weak returns on "virtually all of AP3's portfolio assets", though it claimed a high weighting in alternatives and a "relatively low" weighting in equities "dampened the impact" on returns.
Listed equities, which account for 51.8% of AP3's assets, generated a negative return of -14.1%, as although the fund adopted a series of "defensive positions in the winter" these still generated negative returns in the first half of 2008.
Rising global inflationary pressures in the period meanwhile resulted in the fixed income portfolio of 39.4% of assets yielding a return of 0.8%, although AP3 said its decision to cut the duration of the fixed income portfolio by half in 2005 means risk is at a "relatively low level".
The fund's 4.2% allocation to private equity also resulted in a negative return of -3.5%, however in the first half AP3 completed four new investment commitments totalling SEK600m - bringing the total investment, excluding infrastructure - to SEK15.1bn, while the fund's allocation to infrastructure is SEK1.5bn of which SEK900m is currently invested.
The fund's 6.6% allocation to real estate, including timberland and international real estate funds, produced a positive performance of 1.4%, of which the jointly-owned firm AP Fastigheter returned 3.2%, despite a "patchy" performance by Swedish real estate and a fall in transaction turnover as local rental markets "continued to perform well".
The fund's alternative strategies performed less well, as the life science equity portfolio hit a negative return of -19.1% over the period, as equity market nervousness hit small companies and the biotech sector "especially hard".
Overall, the alternatives strategies sector, which includes life science equities, a small caps fund, new investments in senior bank loans as well as Russian agricultural land - returned -11.4%, reducing its total market value of SEK2.6bn.
Kerstin Hessius, chief executive of AP3, said: "AP3's strategy of diversifying risk across a range of assets and regions, combined with active medium-term asset allocation, proved relatively successful. Through a balanced portfolio of equities and fixed income and an increasing part of alternative investments we restricted the decrease in fund capital to 8%."
In addition, she pointed out in the first half of the year AP3 began an organisational restructure to separate alpha from beta in management operations, which has moved the fund away from management based on asset classes and instead it now has an alpha group and a beta group. (See earlier IPE article: AP3 restructures for alpha-beta separation)
Hessius explained the alpha group has the task of delivering satisfactory returns on its risk exposures without reference to how the long-term normal portfolio is allocated, while the beta group allocates fund capital in accordance with the long-term normal portfolio and with full cost and income efficiency.
She added: "The separation of the portfolio will be largely accomplished during the course of this year. The process of developing our portfolio of alternative investments continues, leading to increased diversification and higher risk-adjusted returns."
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