The Swedish AP funds are an example of sustainable ownership

Sweden’s AP funds are internationally recognized as a role model in sustainability and have continued to develop this important aspect through both responsible investing and responsible ownership, according to 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 fund’s most recent average return is 8.1 percent after fees for the year. “Our collective result for 2023 shows that all of us, with our different management strategies, have navigated well the uncertain financial markets and can summarize 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 in 2023 the AP Funds paid SEK 19 billion ($1.8 billion) to cover the pension system deficit.

The CEOs emphasize how cost-effective management can deliver good returns and also increase confidence in the system. In 2023, the total management costs amounted to 0.08 percent of the assets under management. They add that the AP Funds are also cost-effective compared to international benchmarking. Other milestones for 2023 include reducing the portfolios’ carbon emissions by a further 8 percent.

AP1

During AP1, the team recently increased currency hedging and options strategies in response to the stronger krone. “Our allocation to emerging markets was also reduced last year, based on our assessment that better returns would come from developed markets,” writes Magnusson Bernard.

She predicts uncertainty, higher market volatility and high costs of capital for 2024, even though she believes the peak in interest rates has likely been reached for the coming upward cycle.

“Innovative solutions and productivity improvements will become more important to growth and prosperity than in the period we have just experienced, when market growth was driven by continuously declining interest rates and other incentives,” she says.

SEK 454.4 billion ($44 billion) AP1 achieved a return of 9.1 percent in 2023, with positive profit contributions mainly from listed shares and fixed income securities. Gains that offset negative returns on unlisted assets such as real estate, infrastructure and private equity funds. After taking more conservative positions, profits also came from AP1 gradually increasing its equity allocation and duration from neutral to slightly higher levels.

AP1’s expense ratio stood at 0.06 percent, supported by investments in the fund’s IT capacity and infrastructure.

AP2 reduces costs

AP2 recently reported a total return after fees of 5.9 percent for 2023, benefiting most from its allocation to Swedish and foreign developed equity markets and negatively impacted by real estate.

Eva Halvarsson notes that the fund has done extensive work to reform its governance and organization to better deal with a changing world. In 2023, the investor also revised its asset management strategy, with the aim of generating better returns through a more dynamic and efficient approach and bringing more assets under its own management.

“Another change impacting 2023 was our efforts to reduce costs. Before the start of the year, the Board of Directors decided to reduce the total cost budget by 16 percent, reflecting our decision to bring most of our externally managed mandates in-house and to manage the management of China A-shares to stop. We were able to achieve this without any addition to our internal resources. Moving our office to a new, smaller building also means a cost reduction,” she says.

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

At AP3, CEO Staffan Hansén notes how global equity markets boosted performance. Over the past year, AP3 has largely focused on corporate governance, climate, human rights and biodiversity. It has purchased 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 left AP3 abruptly at the end of the year.

AP4 relies on expertise in local markets

AP4, founded in 1974, returned 9.6 percent after costs. “The good returns our portfolio has delivered are the result of the year’s favorable financial markets and the continued management work we have carried out throughout the year. This is also largely due to our many years of efforts to continuously improve the return and risk characteristics of the portfolio,” says Ekvall.

Until 2001, AP4 was essentially a pure asset manager of Swedish equities. This strong tradition in Swedish equity management 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 percent lower than that of corresponding pension funds internationally,” says Niklas Ekvall.

Reducing emissions (reduced by 11 percent compared to 2022) has also been a major focus. AP4 has reduced emissions by a total of 65 percent since 2010. AP4 takes ownership responsibility and was a member of 56 nomination committees during the year.

“AP4’s efforts to manage climate risks in the investment portfolio continue to yield results in the long term. In 2023, the portfolio’s CO2 emissions fell by a further 11 percent. Since 2010, this decline has been as much as 65 percent,” says Niklas Ekvall.