Sweden’s AP funds model sustainable ownership

Sweden’s AP Funds are recognised internationally as a role model in sustainability and have continued to develop this important aspect via both responsible investment and responsible ownership, said the CIOs of the four main funds that make up the country’s buffer system, Kristin Magnusson Bernard, CEO AP1, Eva Halvarsson, CEO AP2, Staffan Hansén, CEO AP3 and Niklas Ekvall, CEO AP4, in a recent joint statement.

The funds most recent average returns are 8.1 per cent after costs for the year.  “Our collective result for 2023 shows that all of us, with our different management strategies, navigated well in unsettled financial markets and can summarise a stable year,” they said in the joint statement.

At the end of 2023, the total fund assets of the AP Funds amounted to SEK 1,880 billion ($182.8 billion) and during 2023, the AP Funds paid out SEK 19 billion ($1.8 billion) to cover the pension system’s deficit.

The CEOs stress how cost effective management can provide good returns, and also builds confidence in the system. In 2023, total management costs amounted to 0.08 per cent of assets under management. They add how the AP Funds are also cost-effective compared to international benchmarking. Other 2023 milestones include the carbon emissions of the portfolios falling by a further 8 per cent.

AP1

At AP1 the team recently increased currency hedging and option strategies in response to the stronger krona. “Our allocation to emerging markets was also lowered last year, based on our evaluation that there would be better returns from developed markets,” writes Magnusson Bernard.

Through 2024 she predicts uncertainty, stronger market volatility and a high cost of capital even though she believes the peak in interest rates has probably been reached for this upward cycle ahead.

“Innovative solutions and productivity advancements will become more crucial to growth and prosperity than in the period we have just lived through when market growth was driven by constantly falling interest rates and other stimulation measures,” she says.

SEK 454.4 billion ($44 billion) AP1 achieved a 2023 return of 9.1 per cent with positive earnings contributions from listed equities and fixed income particularly. Gains which offset the negative returns from unlisted assets such as real estate, infrastructure and private equity funds. After holding more conservative positions, gains also came from AP1 gradually increasing its allocation to equity and duration from neutral to somewhat higher levels.

AP1’s expense ratio came in at 0.06 per cent, supported by investing in the fund’s IT capacity and infrastructure.

AP2 cuts costs

SEK 426.0 billion ($41 billion)AP2 recently reported a total return after costs of 5.9 per cent for 2023 benefiting most from the allocation to Swedish and foreign developed equity markets and negatively impacted by real estate.

Eva Halvarsson comments that the fund has carried out extensive work on reshaping governance and organisation in order to better cope with a changing world. In 2023 the investor also reviewed its asset management strategy, with the aim of generating a better return using a more dynamic and efficient approach and bringing more assets in-house.

“One further change that affected 2023 was our efforts to cut costs. Before the start of the year, the Board decided to reduce the total cost budget by 16 per cent, which is a result of our decision to bring most of our externally managed mandates in-house, and to discontinue management of Chinese A shares. We have been able to achieve this without any additions to our internal resources. Relocating our office to new, smaller premises also means a cost reduction,” she says.

Climate reporting has also been a central focus at AP2 which now reports emissions data for more asset classes, and Scope 3. AP2 has also signed up to the new framework Taskforce on Nature-related Disclosures, TNFD.

At AP3, CEO Staffan Hansén notes how global equity markets bolstered performance. AP3 has spent much of the last year focused on corporate governance, climate, human rights and biodiversity. It has procured  new system infrastructure, an important step in future-proofing the fund’s operational support. Meanwhile a new head of asset management,  Jonas Thulin, replaces Pablo Bernengo who abruptly left AP3 at the end of the year.

AP4 leans into expertise in local markets

AP4, founded in 1974, returned 9.6 per cent after costs. “The good return that our portfolio has delivered is the result of the year’s favourable financial markets and the ongoing management work we conducted during the year. To a significant extent, this is also due to our many years of work to continuously improve the portfolio’s return and risk characteristics,” says Ekvall.

Until 2001, AP4 was essentially a pure asset manager of Swedish equities. This strong  tradition in management of Swedish equities continues to drive the fund’s culture with a strong focus on responsible corporate governance. Keeping costs low is another essential strategy pillar.

“AP4’s cost level was 37 per cent lower than that of corresponding pension funds internationally,” says Niklas Ekvall.

Reducing emissions (decreased by 11 per cent compared to 2022) has also been a key focus. AP4 has reduced emissions by a total of 65 per cent since 2010. AP4 takes responsibility as owner and served on 56 nomination committees during the year.

“AP4’s efforts to manage climate risks in the investment portfolio continue to yield results over time. In 2023, the portfolio’s carbon dioxide emissions decreased by a further 11 per cent. Since 2010, this decrease has been as much as 65 per cent,” says Niklas Ekvall.