SWEDEN - Swedish buffer fund AP3 says it will analyse its asset management structure in the second half of 2006, according to its latest half-year report.

The comments came as the SEK196.1bn (€21.2bn) fund disclosed investment returns of 1.7% - down from 8.6% in the same period last year.

"AP3 is engaged in a continual effort to ensure cost efficiency across its operations," the fund said in the report.

"In the second half of the year we will focus on ensuring that our asset management structure (the allocation of active contra passive management) and selection of external managers creates and optimal balance between returns and expenses."

AP3 spokeswoman Christina Kusoffsky Hillesöy said that no particular managers or mandates (see list below) were under review. "This is a continuous process. What we are always looking into is if the asset management structure we have pays off. So we will analyse that."

The report also suggests that there will be particular emphasis on "allocation of active contra passive management".

Currently, 80.4% of assets in AP3's portfolio are under active management compared to 74.1% at the end of 2005. 47% of assets are under external management.
Unfavourable developments on the equity markets and rising interest rates cut the net profits to SEK3.4bn (SEK13.8bn in 2005). According to AP3, the results could have been worse if the strategic portfolio had not been changed at the start of 2005.

Whereas the pension fund acknowledges that the step to decrease currency exposure was taken a bit too soon, it "made a positive contribution to the return this year" together with a change in equity allocations and the halving of the duration in the fixed income portfolio.
In the first half of 2006 Swedish equities returned 4.2%, foreign equities 1.5% and fixed income assets practically zero. Last year, equities (both Swedish and foreign) had returned 11.7% and fixed income assets 3.4%.
Good returns were achieved by the fund's real estate assets (including timberland) which amounted to 18.8% (31.2% in 2005). Kusoffsky Hillesöy told IPE that AP3 is still looking into commissioning an advisor to invest up to half of the fund's real estate portfolio into real estate companies outside Sweden.

In the long-run the real estate share of AP3's strategic portfolio is to rise from 2.4% to 8.5%.
Private equity assets, which make up 2.3% of the portfolio, also fared well - returning 16.9% (21% in 2005). As for alternative investments, the report stated that two listed equities portfolios were under construction: life science and infrastructure.

The life science portfolio was valued at SEK349m at 30 June. Investment commitments in infrastructure totalled SEK 600m of which SEK50m had been invested.
Kusoffsky Hillesöy said that no decision had been made on whether or not to disinvest in the internet company Yahoo following allegations of internet censorship in China earlier this year. "We always try to have a dialogue with the companies so we wrote a letter to Yahoo and we will have a dialogue before we make a decision." No date for talks had been set yet.
 AP3s external asset managers as of year-end 2005 include:
- State Street Global Advisors (passive Europe large cap): SEK 20bn
- Merrill Lynch Investment Managers (passive and enhanced US large cap,
passive Europe mid-cap): SEK19.7bn
- Axa Rosenberg Investment Management (active Europe mid cap): SEK 3.4bn
- JP Morgan Asset Management (active Europe small cap, active Japan, active
Asia-Pacific): SEK 6.9bn
- Capital International (active Japan): SEK 3.8bn
- Schroder Investment Management (active Asia-Pacific): SEK1.9bn
- Nomura Asset Management (active Japan): SEK 1.9bn
- Batterymarch Financial Management (active US small cap and mid cap):

Plus four more active mandates under SEK1.7bn