Sweden’s AP buffer funds have reduced their domestic equity bias over the last year, after previous calls for the five funds to justify their home bias.
The Swedish government’s annual report into the AP fund system, covering AP1 to AP4 along with AP6, revealed that the allocation to domestic equities dropped to 13% of total assets by the end of 2014, from 14% a year before.
In last year’s report, the government had said the funds should reconsider their heavy home investment bias because this approach in theory presented a higher risk.
In the latest report, it detailed the justifications the pension funds had since given for this stance.
It said: “The government welcomes the fact that the funds have to a greater extent than before justified their weighting to the Swedish stock market, and hopes that the funds will continue to report its considerations on the issue with the same clarity.”
Funds AP1-AP4 said that Swedish companies were generally very well run, and cited the approach as a potential reason for their high historical returns.
One argument used by the funds for overweighting the domestic stock market was that Swedish companies took responsibility for sustainability issues, the report said.
AP1 said that despite this, the valuations of Swedish companies were no different than valuations of stocks elsewhere, and that this justified the continued dominance of domestic stocks in its allocation.
AP4, meanwhile, said the overweight to Swedish shares meant a lower carbon footprint by international standards, since sectors with high levels of emissions made up a relatively small amount of overall stock market value.
AP2 said that as a result of its strategy to add greater diversification to its portfolio, it had slimmed its weighting to Swedish equities to 10% at the end of 2014 from 20% in 2010.
AP1 to AP4 and AP6 collectively produced grew assets by SEK147bn (€15.5bn) after costs in 2014, corresponding to a return of 14.1%.
In the report, the government said: “This was the best result in absolute terms and the fourth best result in percentage terms since the beginning of 2001.”
It said most of the result could be explained by the high proportion of equities contained in the AP funds’ portfolios as well as strong development on the equity and bond markets in combination with asset value increases as a result of currency exposure.
Assets under management rose to SEK1.185bn by the end of the year, according to the report.
It said there had been big variations in AP fund performance over the years in line with financial market developments.
Since the start of 2001, the funds’ average annual returns had now risen to 5.3%, the report said, adding that this had outpaced the rise in the income index over the same period, which was 3.1%.
AP7, which has the role of running the default fund within the premium pension system, had produce a 29.3% return in 2014, the report noted, which was around double the 15.1% average return generated for private funds within the system.
The AP funds 1-4 had continued spreading their risk over the last few years, allocating capital to asset classes other than equities and bonds, for example, alternative assets, the report said.
At the end of 2014, their collective alternatives allocation was 18% of total assets, up from 5% in 2007, it said.