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AP7 cuts gearing and adds risk-factor investments

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Sweden’s AP7 plans to introduce factor investing into its portfolio for the first time as part of a risk-reduction exercise.

The national pension fund that provides the default option in Sweden’s Premium Pension System (PPM) will also lower the gearing on its equity portfolio.

The SEK430bn (€41.4bn) pension fund said: “As a step in implementing the new strategic portfolio, which was decided in 2016, AP7 is now starting to invest in factor premiums.”

The goal, it said, was to invest 10% of the fund in these strategies over the next few years. 
“At the same time, the normal level of leverage is being reduced to 25%,” it said.

This is reduction from the previous normal level of 35%.

However, the actual level of gearing was to be set even lower, at 15% percent, AP7 said, due to its previous assessment of market valuations.

At the end of December, the pension fund’s actual level of gearing was around 25%, according to its 2017 annual report.

Since 2010, a central part of AP7’s management strategy for its SEK396bn equity fund – which accounts for the vast majority of its overall assets – has been passive exposure to a global index with leverage of 50%. AP7’s default option pension product, known as AP7 Såfa, is a lifecycle fund combining AP7’s equity and bond funds.

In 2015, AP7’s board opted to halve the actual level of gearing to 25% because stockmarket valuations were considered high. In December 2016, when presenting a new strategic portfolio to be implemented by 2020, it reduced the normal leverage to 35% from 50% in order to increase the room for manoeuvre associated with the change.

The first step in introducing other risks then began in 2017, and involved increased exposure to emerging markets and private equity, AP7 said.

The pension fund said the new management strategy was aimed, in particular, at reducing risk through diversification.

“Another central part of the strategy is to systematically apply more dynamic risk-taking, where the fund’s overall risk level is adjusted to extreme market valuations,” it said.

In February the pension fund put out a tender for advice on “active alpha” procurement, in part of its move to add risk-factor investments to its portfolio. 

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