Carlo Svaluto Moreolo looks at the numbers and finds that Sweden’s national buffer funds, despite their uncertain future, are faring quite well

Although uncertainty reigns over the future of Sweden’s AP buffer funds, they continue to make good use of their capital. All funds made double-digit returns last year, except Sjätte AP-fonden (AP6), the fund mandated to invest in domestic private equity and venture capital assets. The fund reported a 6.5% return after costs for 2014, down from 9.2% last year.

Första AP-fonden (AP1) and Andra AP-fond (AP2), in particular, performed better than the previous year, posting returns of 14.6% and 13.3%, respectively. 

Tredje AP-fonden (AP3), Fjärde AP-fonden (AP4) and the key equity fund of Sjunde AP-fonden (AP7) all lost some momentum, though they recorded strong performances, returning 13.7%, 15.7% and 31.1%, respectively. AP7, which manages the default option for the premium pension system, saw its bond fund return 2.8%, up from 1.8% in 2013.

AP7 chief executive Richard Gröttheim warns that returns from the stock market would “sooner or later” decrease. He adds that, over several decades, savers in AP7 should reasonably expect to earn 7-8% per year (see page 38).

The positive performance of AP7’s equity portfolio was partly driven by the fund’s exposure to derivatives, which included equity futures and foreign exchange contracts. That was implemented using total return swaps that created leverage equating to about SEK103.9bn (€11.2bn), or around 50% of the fund’s assets. 

The AP funds’ overall asset allocation is changing significantly, as the funds increase risk in their portfolios in order to contribute more to the health of the Swedish pension system. 

With the release of its annual report, AP1 said that, as part of its long-term strategy, it would now focus on unlisted, illiquid assets, including private equity and infrastructure.

The 2014 figures showed the weight of equities and bonds in the fund’s portfolio dropped, while exposure to hedge funds and private equity rose from 4.9% to 5.9% and from 3.3% to 4.4% of overall assets, respectively. This year, AP1 joined forces with AP3, Swedish pension provider Folksam and Borealis Infrastructure to make a SEK60.6bn (€6.5bn) investment in electricity distribution networks in Sweden.

Last year, AP2 started an overhaul of its investment strategy, which resulted in significantly higher exposure to emerging markets, managed by its in-house team rather than external managers. The fund also expanded its Chinese equity holdings, adding $200m (€175.5m) to its existing portfolio, which returned a staggering 59.1% in 2014.

As well as managing capital and making a case for maintaining the buffer system, the AP funds continue to show a commitment to do what they can to tackle climate change. 

Last year, they were among the signatories of a statement calling on governments to encourage the growth of green bonds, and signed a shareholder resolution urging BP and Shell to improve their carbon footprint.