Swedish national pension fund AP7 says active management dented its 2016 profits, despite posting a 15.5% return last year.
AP7, which provides the default option in the country’s Premium Pension System (PPM), more than doubled its return relative to 2015’s figure in its key balanced pension product Såfa.
In its annual report, AP7 said: “The fund’s positive development is explained by the rise on the global equity markets in 2016, which was intensified by leverage and also by the weakening of the Swedish krona.”
However active management had proven a drag on performance, according to the report.
Long/short asset management had detracted from investment profits during the year to the tune of SEK5.5m (€576,000), while tactical allocation had knocked SEK23.6m off returns, AP7 reported, saying the latter was due to less exposure to global equities than the benchmark.
However, the profit on private equity had offset the active management losses.
AP7 figures showed Såfa outperformed the private PPM funds on offer, which returned an average 8.8% in 2016.
AP7’s equities portfolio – the largest of its two building blocks for its pension products – returned 16.5% last year, which it said was in line with the benchmark.
The return on the bond portfolio fell to 0.6% last year from 0.8% in 2015, and was 10 basis points below the benchmark.
Total assets in the two funds grew to SEK343bn from SEK283bn.
Richard Grottheim, the fund’s chief executive, said: “How the return will be in the next few years, no one knows. However, we know that the long run it can not be at the levels we have seen in recent years.”
Sooner or later, the stock market would go down, he warned.
“It will also affect AP7’s savers, and leverage will amplify the downturn, just as it strengthens the gains,” Grottheim added.
He said AP7 continued developing its strategic equity portfolio last year, and would introduce the changes gradually over the next few years.
One of the main aims was to boost diversification within AP7’s constraints, reducing risks for savers at age 65 and raising the minimum level of pensions in the system, he said.
“We have also decided in the coming year to design a green mandate that invests in listed companies with activities that contribute to solutions to climate problems,” he said.