Global equity declines hit AP7 hard
SWEDEN - Sjunde AP-fonden (AP7) has reported a 42.8% fall on its Premium Choice Fund, while the Premium Savings Fund, the default for savers in the Swedish pension system (PPM), dropped 36.2% in value last year.
In the AP7 annual report for 2008 Peter Norman, the executive director, admitted the performance last year was "terrible" but said the fund is "convinced that shares are the best option for long-term retirement savings", and strong fluctuations in returns is the price that must be paid for a higher long-term return.
Figures from the report showed the Premiesparfonden, the default fund that has a 27.2% share of the total PPM assets, returned -36.2% in 2008, with the 10% allocation to emerging market shares producing the worst return of -57.5%.
However, the SEK62.65bn (€5.49bn) pension fund's largest allocation, a 52% weighting to global shares, also performed poorly with a return of -30.3%, while the 20% investment in Swedish shares yielded -37.3%.
Nominal bond investments, worth 4% of the portfolio, produced the bets return of 14.8%, closely followed by the 2% allocation to hedge funds which yielded 14.2%, while real interest rate bonds and active currency achieved returns of 5.3% and 1.1% respectively.
Currency hedging was less successful than officials had anticipated and delivered a return of -14.5%, while the 8% allocation to private equity yielded the second worst result with a return of -40.4.
The SEK 1.69bn Premievalfonden, which holds a 0.7% share of the PPM assets, meanwhile produced an overall return of -42.8%, as the fund has an allocation of 90% in equities and 10% in private equity.
Again the Premium Choice Fund had 50% of its portfolio in global equities, which returned -29.9%, however the 20% allocation to emerging market shares produced the worst return of -60.1%.
The 20% investment in Swedish equities also produced a -36.7% return, while private equity also performed poorly with a yield of -44%, with active currency producing the only positive return of 1.2% as even the hedging strategy returned -14%.
Christian Ragnartz, chief analyst at AP7, admitted the turbulence in the financial market had affected the results of operations as the funds are "mainly invested in global equities" but despite this he suggested AP7 is "well positioned for a future that will hopefully return to more normal conditions in 2009".
In a foreword to the report, Norman stated AP7 would work on the format of a "generation" fund option - commissioned by the Swedish government - for those who do not make an active choice in the PPM system in 2009, which will be designed so there is higher investment risk when you're younger and less risk as the member matures.
The report also highlighted the pension fund's progress on its 'pure alpha' strategy, which it adopted in 2005, as its traditional model of active management had not given "satisfactory results".
Richard Gröttheim, executive vice-president of AP7, wrote in the annual report it had been "difficult" to find external managers who can manage this type of approach, although it already employs a number of pure alpha mandates, including three managers of Swedish shares and an external European equities manager.
AP7 added in its report it believes pure alpha is the "future model for asset management" and it will expand this type of approach as external managers should be able to deliver it for other investment regions, with the suggestion that eventually it will see "a transition to this management model for the whole portfolio". (See earlier IPE article: AP7 switches to hedge fund replication)
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