Sweden’s largest national pension fund is moving closer to a huge shift in its equities management – taking much of its index-following equities portfolio out of the hands of external managers and managing the “beta” itself.
Lena Fahlén, AP7’s chief investment officer, told IPE in an interview: “It’s more effective to have the beta portfolio, or the index portfolio, managed in-house, so we are building capabilities — it’s a lot of systems and processes, of course.
“We will do a small pilot passive mandate to make sure we have all the processes working well,” she said, adding this would probably happen as early as this spring.”
The plan to take a large proportion of equities index management – which accounts for nearly all of the fund’s now SEK1.36trn (€120bn) equities portfolio – in-house has been afoot for more than a year.
“We’re going to start very small and make sure we have the capabilities,” Fahlén added.
“We’ve already recruited staff, we’re investing in systems, the technology to be able to manage an internal passive mandate – which is quite doable – so we’re looking at putting a pilot in place this spring.”
“Going from there, of course – scaling up – will take time and I don’t think we’ll do everything internally because it’s a good thing for us to benchmark ourselves to external managers and we’re very happy with the managers we do have,” she said.
“Since the AUM has grown so much and since our calculations and forecasts point to it growing even more, it’s more effective to have it insourced”
Lena Fahlén, AP7’s chief investment officer
“But since the AUM has grown so much and since our calculations and forecasts point to it growing even more, it’s more effective to have it insourced,” she continued.
AP7 currently has three external managers for its passive equities – BlackRock, UBS Asset Management and Northern Trust Asset Management – and Fahlén said it is still unknown how long that three-strong roster would be when the switch to internal management has been made.
“We don’t know — we’re too early in this work, and it will be a long-term process,” she said.
As to how much of AP7’s near SEK1.3trn of index-run equities would eventually be managed within its own four walls, the CIO said: “I think that will be a discussion with the board because that’s a major decision, but my guess is that we will have quite a lot managed in house.”
AP7’s stated reasons for creating the capacity to manage equities in house as well as externally – and using both passive and active approaches – are the pension fund’s growing assets under management, as well as the geopolitical situation and climate challenges.
“Regarding geopolitics, for example, we must have the portfolio closer if we want to easily remove certain holdings,” Fahlén said.
“I’m not saying that we would have taken everything out of Russia if we’d had the portfolio internally managed, but I think we would have lowered risk toward Russia,” she noted.
“When you have everything outsourced, of course you can talk to your external managers, but it’s quite a burdensome process.
“So it becomes more effective to have it internally managed and we would be able to manage the risks in a better way,” she said.
Particularly since its mandate was expanded in 2023 to allow for more alternative investments such as real estate, infrastructure and private equity, AP7 has been making changes at its organisation – which has traditionally been lean with a low staff count compared to its large portfolio — hiring more staff for different asset classes.
The fund announced a major addition to its fledgling real estate exposure this morning, buying a SEK5.6bn portfolio of Swedish public buildings such as courts and buildings for the Swedish Police Authority to kickstart a new social infrastructure-based Nordic real estate subsidiary, which it aims to build up to SEK25bn over five years.
AP7 reported weaker-than-usual annual returns yesterday, at 4.25% overall, with 4.3% for its large equities fund and 3.2% for the smaller bond portfolio.
Fahlén said the combination of a strong Swedish krona on foreign exchanges, combined with the weak dollar, had dented returns last year, while the fund’s still-small private equity holdings have underperformed.
“We had some strong headwinds on the currency side in 2025, with the Swedish krona gaining almost 20% against the dollar last year – but in 2024, currency developments had given us a strong tailwind,” she said, adding that AP7 does not hedge its holdings.
