AP2 has overhauled its investment strategy in early 2014, growing emerging market (EM) exposure and transferring responsibility for nearly all such mandates from external asset managers to its in-house team.

The Swedish buffer fund, which manages SEK280.3bn (€30.5bn) worth of assets, said in its half-yearly report that the changes came despite initial weak returns from its EM holdings during the first quarter.

Nevertheless, it said its EM portfolio staged a “strong” recovery from March onwards but singled out its Chinese equity holdings for its negative returns.

It said the value of its listed holdings in the country was now “very low”.

The fund’s alternatives portfolio, which alongside its Chinese holdings comprise unlisted real estate, alternative credit and private equity funds, still returned 5.8% over the first six months of the year.

During the period, the fund completed an overhaul of its strategic portfolio and investment model, boosting exposure to EM equity and local currency denominated debt.

It also said the fund’s in-house team was now responsible for the management of its EM bond portfolio denominated in hard currencies, with external managers left to focus on those in local currencies.

The half-yearly report added: “At the same time, the fund has changed the composition of its equities exposure in industrialised countries, reducing the GDP-weighted portfolio, choosing instead to invest in low-risk ‘minimum variance’ portfolios that offer optimum diversification, where exposure is inversely proportional to the equities risk.”

Its Swedish and foreign equity portfolios returned 9.8% and 11%, respectively, while fixed income returned 6.5%.

Overall, the fund saw returns of 7%, including management costs, significantly up from the 4.3% return for the same period in 2013.

AP2 chief executive Eva Halvarsson also sought to prove the value of the current buffer fund system, echoing some of the sentiments expressed by her AP3 counterpart Kerstin Hessius.

Halvarsson stressed that AP2 had more than doubled in value compared with the SEK134bn in seed capital granted to each of the four buffer funds.

She added that justification for the proposed overhaul of the buffer fund system, now endorsed by the cross-party Pensionsgruppen, was “neither clearly stated nor convincingly argued”.

The chief executive instead said changes to the buffer fund system’s investment guidelines should be introduced but without the restructuring of the system that would see ownership of the buffer fund assets transferred to a new agency and its principal.

“The important thing is to implement changes in the way that benefits the pension system as a whole,” she said.

“The negative consequences of conducting a comprehensive and protracted reorganisation are likely to far outweigh the benefits, proving not only costly but seriously increasing the operational risks for a long time ahead.”