SWEDEN - AP1, one of Sweden's national buffer funds, is "working hard" to reduce volatility in its equity portfolio following a year of turbulent markets and continual economic uncertainty.
According to its annual report, its equity portfolio fell by 9.8% in 2011, while the total SEK213.3bn (€24bn) portfolio fell by 1.7% before costs and 1.9% after costs for the full year.
Johan Magnusson, who holds the dual roles of chief executive and CIO, said AP1 had reviewed the equity strategy last autumn to create a more robust portfolio.
This led to a more strategic focus and active asset allocation, and a shift away from passive management.
Historically, the fund has invested more than half of total assets in equities. Because equity prices tend to be more volatile than those of other asset classes, equities account for the lion's share of the fund's total risk.
Over the last 12 months, AP1's equity allocation has been cut from more than 60% to just under 50% in favour of fixed income and alternatives.
Magnusson said the buffer fund would introduce risk-reducing strategies in the equity portfolio. As a result, the geographical remit for AP1's in-house asset management - which currently manages only Swedish and European equities - is likely to be broadened.
The fund will therefore continue to increase the amount of assets managed in-house, which currently stands at 58.6%.
During the year, the management of credit bonds was also brought in-house to integrate credit bonds into the rest of the fixed income management and increase flexibility. Fixed income returned 7.1% for the year.
At the end of 2011, the fund was invested 49.2% in equities, 40.9% in fixed income and 9.3% in alternatives, while it had a currency exposure of 21.3%.
The strategic allocation is 50% in equities, 30% in fixed income and 20% in alternatives.
Another change implemented by AP1 during 2011 was to boost its allocation to alternatives, which returned 10% for the full year.
Real estate investments were increased in particular, and the fund said it aimed to continue adding to investments in the asset class in the coming years.
Last year, AP1 created real estate company Cityhold together with AP2 to invest in office space in large European cities.
Magnusson said alternatives served as a "good complement" within the portfolio and that he expected them to produce a more stable return over time, increasing the portfolio's robustness.
He conceded they also entailed higher costs, but he argued that returns after costs were what mattered most.
Urban Karlström, chairman at AP1, said alternatives had grown in importance as various asset classes became increasingly correlated, but he lamented the fact that the buffer funds' current investment rules for the asset class were "inefficient".