SWEDEN - Sjätte AP-fonden (AP6), the Sixth Swedish National Pension Fund, has signalled a change of strategy going forward, away from investment in "young growth companies".
AP6 has a mandate to invest in mainly Swedish small and medium-sized growth companies to help develop the Swedish economy.
However, poor performance in companies with a turnover of SEK100m (€9.7m) or less had led the pension fund to announce it will "ultimately reduce its engagement in this type of business".
Erling Gustafsson, chief executive of AP6, said while AP6 will maintain its current portfolio "when it comes to brand new investments we must carefully evaluate the continued commitment".
Buffer fund officials argued that, on the one hand, it is supposed to invest in young growth companies - which take around 10 years to grow before achieving a good return - but, on the other hand, it has a target annual return to meet.
"It is impossible to have a return better than the stock market every year, and at the same time invest in young growth companies," said a spokesman for the fund.
AP6 officials claimed that since the fund's inception in 1996 it has been "torn between the need for a short-term annual return and the need to invest in young growth companies". It argued that a near 20% annual return in most of its holdings has had to be used to offset losses in the young company growth sector.
It estimated the negative return in this area to be worth just over 8% annually, "which represents an overall loss of SEK1.5bn". That said, part of this is the consequence of the fund's investments in the early 2000s, when it was instructed to invest in venture capital and dotcom companies, many of which did not survive.
AP6 noted: "We simply cannot keep on investing in young growth companies if we, at the same time, are to live up to the demands of annual returns, as our owners have instructed us. We would otherwise be stuck in a Catch 22 situation."
Despite the poor performance of the sector, the pension fund said it had increased its assets under management by 60% since its inception, from SEK10.4bn in 1996 to SEK16.4bn by the end of December 2008.
However, AP6 said it intends to seek a gradual movement towards more mature growth companies, holding approximately SEK1bn or more in turnover - an investment area in which the pension fund has had more success.
The pension fund said its strategy is to buy a company with the intention of selling it a couple of years later, and pointed out that "eventually we will have sold all our existing companies in order to buy new ones. But there will never be a 'sale' of our young growth companies".
Lennart Jeansson, chairman of AP6, added: "We must focus on the visibility of the value of the portfolio and focus more on profitability. This does limit new commitments to the young growth companies sector."
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