Investor Profile

Sweden’s recipe for success: Active, low cost, ESG

Back in 2001, Sweden’s four buffer funds had combined assets under management of SEK 546 billion ($57 billion). Today, the combined assets of AP1, AP2, AP3 and AP4 have grown to SEK1,937 billion ($203 billion) in a year that also saw the four funds active, low-cost approach focused on ESG integration reap the best returns in their history. The average return of the four funds came in at 19.3 per cent after expenses, (compared to an average of 10.5 and 10.7 per cent on a five and 10-year basis respectively) well above the income index returns.

Active strategy

At AP1, where returns just topped the pack at 20.8 per cent, strategy focuses on robust, active decision-making and a bold risk mandate. All Swedish equities and most of the fund’s exposure to Europe and the US is managed internally although emerging market equities are managed in collaboration with selected external managers.

“Our strategy was to allocate capital actively and act quickly to achieve desired exposures for the fund as market sentiment changed,” said chief executive Kristin Magnusson Bernard. “Formulating strong views, daring to act on them and constantly challenging them have been critical success factors for us during the last year, and will remain so going forward.”

At AP4, which returned 19.2 per cent, active management was also a key tenet of success. It contributed 3.5 percentage points to the return corresponding to SEK15.2 billion ($1.6 billion) in 2021. The fund also has around 17 per cent of its portfolio in alternatives where integrating sustainability is a key theme.

AP3 also bagged its best ever annual results of 20.7 per cent, delivering an average annual return of 11.1 per cent over the last 10 years bolstered by the fund’s large exposure to listed Swedish equities with renowned sustainability credentials.

At SEK 441 billion ($46.3 billion) AP2, returns of 16.3 per cent were led in the main by private equity which returned 66.1 per cent, said chief executive Eva Halvarsson.

Low Costs

Low costs linked to sophisticated internal management define strategy across all four funds.

At AP1 the total expense ratio came in at 0.07 per cent. At AP2 the fund reduced the asset management costs to historically low levels of 0.11 per cent while at AP3 the asset management cost ratio was 0.08 per cent. At AP4 2021 costs were also 0.08 per cent of assets under management.

This amounts to “less than half that for corresponding pension funds internationally,” according to Niklas Ekvall chief executive at AP4.


ESG integration is a key tenet across all the funds. At AP2, global equity and credit portfolios have been managed in accordance with the EU Paris-Aligned Benchmark (PAB) since 2020. It means the fund no longer invests in around 250 companies because they receive revenue from coal, oil or gas. The total carbon emissions of AP2’s equity portfolio continues to drop, declining 20 per cent in 2021 compared with the previous year mainly due to changes in holdings but also companies cutting their emissions.

Elsewhere, AP4 has cut the carbon footprint of its investments in listed equities by 60 per cent since 2010. AP4 has also set a target to have net-zero emissions by 2040 and is increasing its allocation to investments that contribute to the sustainability transition.  During 2021, AP4 made such new thematic sustainability investments of SEK 13.7 ($1.4 billion).

ESG integration is shaped by the Council on Ethics which continued advocacy at around 90 companies, focusing dialogue around  human rights, corporate governance and climate. As sustainability is increasingly being integrated into the funds’ management strategies and objectives the Council on Ethics plans to review its mission and strategy ahead.

Looking ahead

All buffer fund CEOs warned of a more difficult investment climate ahead.

“If 2021 was the year of recovery, we are now heading towards reductions in monetary and fiscal stimuluses around the world,” said AP1’s Magnusson Bernard. “The economic cycle is maturing quickly, and central banks have started to unwind their asset purchases in various ways ahead of future interest rate increases. When, and if so by how much, inflation falls back will affect both how decision-makers react and risk appetite in financial markets. Geopolitical tensions and energy dependencies are likely to continue influencing markets.”

AP4’s Ekvall warned of widely varying economic outcomes ahead.

“The tug-of-war between various scenarios will likely at times lead to nervosity and market turbulence. In general, in the coming years we cannot expect to see the same, favourable investment environment and very favourable returns on financial assets that we have experienced during the past 10 years.”


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