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AP4 Improvements despite criticism

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Public pension funds are scrutinised in general and every decision is under the microscope, perhaps more so than in most areas in Sweden, with its tradition of open and transparent governance.

During the past year this has lead to heavy media coverage and wide-ranging criticism of Sweden's national buffer pension funds, the AP funds. The loss of over SEK40bn (€3.9bn) during 2008 led to unprecedented media attention. The management teams of these funds often find the criticism and focus skewed and taken out of proportion.

Mats Andersson, chief executive officer of AP4, the Fourth Swedish National Pension Fund, has been particularly vocal about the often negative voices heard in the media. Andersson agrees that criticism is justified when it comes to the ability of the fund to beat the benchmark index, but not when it comes to the large equity allocation. Here he has the support of all his colleagues in the other AP funds. "I claim that the criticism is misguided when it concerns the pension funds' large equity allocation and the fact that our total return tracks the market on its way up as well as down."

Andersson and the other AP fund managers argue that the large equity proportion is a result of the mandate given by the government to the funds. As long-term investors, the AP funds have to look at how large returns must be over time to avoid a reduction in pensions, based on the Swedish Social Insurance Administration's statistics on life spans, employment rates and the labour force, Andersson says, reiterating what he said in AP4's half-year report.

The AP funds must deliver, on average, an annual real rate of return in excess of 4%. This means that a large equity allocation is necessary to achieve this, which ordinary bonds would not provide. Andersson concedes that AP4 must become better at adjusting its asset allocation over the business cycle, but that work to improve strategic allocation began in 2001 and is continuing.

Andersson is pleased with the first six months of the year, as he believes that steps taken several years ago, well before the crisis, is now beginning to pay off. He is convinced that AP4's total return this year has benefited from the fund having more than 60% of its assets invested in equities, with a significant proportion in Swedish equities, as the fund's domestic market did better than many others. However, he warns that the recovery may still be bumpy and that a stock market rally does not equal an economic upturn.

In order to capitalise on business opportunities created by the economic turbulence, such as pricing disparities, AP4's board made way for investments that are less orthodox than those in traditional asset management.

The first investment was made in the property management company Hemfosa, where the business concept is to take advantage of opportunities expected to arise in the Swedish real estate market as a result of the crisis.

Andersson is also proud of the achievements of AP funds' common platform, Ethical Counsil, whose action in tackling ethical and environmental issues through dialogue with various companies has won new territory and appreciation.

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