Glossary

Aa

  • Absolute return target

    A targeted return intended to produce over time a positive return regardless of market trends. Contrast with a relative return target, for which the target is to outperform a specific index.

  • Active management

    Asset management via a portfolio composed differently from the index in an effort to secure a higher return.

  • Active position

    Difference between a portfolio and its reference or benchmark index, e.g. in terms of wighting in individual equities (in active stock selection), sector weighting (in active sector allocation) or duration (in active duration management).

  • Active return

    Difference between the return on a portfolio and the return on its benchmark index. The active return is disclosed in the Fund's annual and interim reports for the actively managed portfolio with liquid assets. The term is used synonymously with the return versus index, relative return and outperformance.

  • Active risk

    Risk that arises as a result of active management. Is defined as the standard deviation of the difference between actual performance and index performance (i.e. the standard deviation of the active return). Also known as tracking error.

  • Active stock selection

    The taking of active positions in individual equities, aimed at outperforming the reference index.

  • ALM-analysis

    Asset Liability Modeling. Analysis model used to determine AP4's optimal long-term asset allocation. An ALM analysis is premised on the Income pension system's liabilities, forecast pension contributions and the expected return and risk of different asset categories. The model simulates theoretival portfolious to provide a basis for selecting a long term portfolio that provides the optimum combination to meet the Income pension system's commitments.

  • Asset management cost quotient

    Operating expenses as a ratio of average fund capital.

  • Automatic rebalancing

    Automatic rebalancing, also called "the brake", is triggered when liabilities exceed assets in the pension system. This reduces the indexing of pensions until the pension system is once again in balance.

Bb

  • Balance ratio

    The total assets of the national pension system (excluding premium pensions) divided by pension liabilities. It is an estimate of the pension system's financial balance. If the balace figure falls below 1.0, the automatic rebalancing mechanism is triggered and pension disbursements are reduced.

  • Benchmark index

    Combination of various reference indices. Is a series of index returns against which AP4's total risks and return is compared. Returns mirror those from the strategic portfolio.

  • Beta value

    Denotes the portfolio's propensity to rise or fall when the benchmark or reference index rises or falls. It states the expected percentage change in the value of the portfolio given a chance of 1% in the reference or benchmark index.

  • Brake

    Automatic rebalancing, also called "the brake", is triggered when liabilities exceed assets in the pension system. This reduces the indexing of pensions until the pension system is once again in balance.

  • Buffer fund

    The name for the First, Second, Third, Fourth and Sixth National Swedish Pension Funds. The funds' purpose is to compensate for temporary deficits in pension contributions in relation to pension disbursements (i.e. periods when disbursements exceed contributions) and also to maintain the valur of pension assets in relation to pension liabilities. See Balance ratio.

Cc

  • Capitalmarket

    Collective term for the stock market (equity) and the credit market (debt capital).

  • Contigent Liability

    A potential obligation that may occur depending on the outcome of a future event. A contingent liability is recorded in the ledger only if the contingency is probable and the amount of the liability can be estimated.

  • Contribution value

    Estimate of the present value of future forecast pension contributions to the national pension system (excluding the premium reserve pension scheme). Calculated by multiplying a three-year average of contributions by the "turnover period", which measures the average time between acquired pension entitlement and disbursed pension payments.

  • Corporate bond

    A corporate bond is a debt instrument issued by a company, to enable the possibility to borrow money.

  • Corporate Governance

    The sharing and exercise of rights and responsibilities in relation to the running of a company, notably between management and shareholders.

  • Country risk

    A risk arising from differentials in yield spread between countries in the context of an international bond portfolio.

  • Credit exposure

    The amount that is endangered if borrowers suspends payments.

  • Credit risk

    Risk that a counterparty wholly or partly cannot perform his obligations due to financial incapacity.

  • Currency risk

    The risk of change in value of the portfolio as a result of fluctations in foreign exchange rates.

Dd

  • Depositary bankservices

    Services provided by a depositary bank, also known as a custodian, like keeping financial assets, deliver and receive securities in buying and sale, administer various types of business events in the securities held in custody (eg coupon payments and dividends), offering accounts in different currencies, and so on.

  • Derivative

    Collective term for many different instruments. The valur of a derivative is linked to the value of an underlying instrument. A government bond future is an example of a derivative that have as its underlying instrument a government bond.

  • Duration

    Measure of interest rate risk. Measures the average outstanding life of all future cash flows (coupon yields and final maturity) for a bond or portfolio of bonds. Is also know as McCauley Duration. See Modified duration.

Ee

  • Enhanced index management

    See semi-active management.

  • Excess return

    Achieved when a portfolio produces a higher return than its benchmark or reference index. Earning an active return greater than zero.

Ff

  • Fixed income portfolio

    Comprised of fixed income assets including interest rate derivatives. The foreign portion of the fixed income portfolio's reference index is hedged in Swedish kronor.

  • Foreign exchange exposure

    Denotes the proportion of the portfolio exposed to currencies other than the Swedish krona and for which curreny risk has not been neutralised by hedging.

  • Fundamental analysis

    Analysis aimed at predicting a complany's future value. Is based primarily on information about companies and their markets, e.g. information about their executive management, strategy, earnings, forecasts and financial status and performance.

Gg

  • Global equity portfolio

    Consists of equities and equity-based instrument listed on stock exchanges included in the MSCI All Country Index. (Note that an equity listed on a Swedish stock exchange can be included in the global as well as the Swedish equity portfolio. At the time of purchase, the holding is assigned to the intended portfolio.) Foreign exchange derivatives are also managed in this portfolio.

  • Government bonds

    A bond issued by a state. The bond is used to fund the state's medium-term and long-term borrowing needs. Swedish state borrowing, through the issuance of government bonds, is managed by the National Debt Office.

Hh

  • Handelsbanken Market Bond Index

    Svenska Handelsbanken's return index for Swedish fixed income bonds.

  • Hedging

    Neutralisation of foreign exchange risk by changing the currency exposure, from a foreign currency to Swedish krona, using foreign exchange forward contracts, for example.

Ii

  • Import basket

    Basket of currencies weighted in relation to their respective share of Swedish import revenues.

  • Index management

    Also referred to as passive management. Management of a portfolio so that the holding mirror the composition of a designated index so the portfolio achieves the same return as the index.

  • Information ratio

    A measure of risk-adjusted return. Measured as a portfolio's active return compared to its active risk.

  • Insidersituation

    When a person with visibility of a company, utilizes information to make an investment before the company publish a new feature that make the stock rise.

  • Interest rate risk

    Measurement of the change in value of a fixed income portfolio after a specified change (usually 1% in market interest rates.

  • Interest-bearing instruments

    A financial instrument that pays interest, such as a bond.

  • Investment assets

    Used in the annual report to denote the Fund's total capital under management. In the balance sheet, however, investment assets are defined in accordance with generally accepted accounting principles. These require that buybacks, liquied assets and derivatives with negative market value are reported on the balance sheet under items other than investment assets.

  • Investment grade

    Term to describe borrowers assigned an A-rating (A, AA, AAA or equivalent) or triple-B-rating (BBB or equivalent).

  • Issuer

    An institution that gives out a security, for instance an equity.

Ll

  • Legal risk

    Risk of unforeseen losses arising because of legal errors in agreements and contracts, e.g. than an agreement proves invalid or less advantageous than intended.

  • Liquidity risk

    Risk that a financial instrument cannot be divested within a reasonable period without significantly affecting its price.

  • Listed

    An asset listed on a Swedish or a foreign stock exchange, or otherwise publicly accessible way.

  • Long position

    Positive exposure to a market or type of asset. For example, a positive exposure to a foreign currency using derivatives.

Mm

  • Market risk

    Risk of a change in the valur of a financial instrument due to changes in equity prices, exchange rates or interest rates.

  • Modified duration

    Measure of interest rate risk. Defined as the percentile change in value of a fixed income security as a result of a 1% parallel shift in the qield curve. Calculated by dividing duration (see definition) by the market interest rate plus 1.

Nn

  • Net contributions

    Difference between annual pension contributions to the national pension system and disbursed pension payments.

  • Non-government bond

    Bond carrying a higher credit risk than a government bond, for instance a corporate bond.

  • Normal portfolio

    The asset allocation assessed as most closely corresponding to the Fund's general long-term objective. The composition of the normal portfolio is decided by the Fund's Board of Directors following ALM analysis. See also strategic portfolio.

Oo

  • Operating capital

    The sum of a company's net debt, or total assets minus liquid assets, financial assets and non-interest-bearing liabilities.

  • Operational risks

    Collective term for risk of losses arising through operational disruptions, e.g. human error, deficient systems or shortcomings in instructions or procedures.

Pp

  • Passive management

    Management of a portfolio so that the holdings mirror the composition of a designated index so the portfolio achieves the same return as the index. Also known as indexing.

  • Pension liability

    The financial commitment to current pensioners plus total pension entitlements accumulated by those in work.

  • Portfolio risk, ex post

    The standard deviation of the return on the portfolio during the period. Indicates the extent of fluctuations in the value of the portfolio and reflects the portfolio's risk level. See also Volatility.

Rr

  • Real return

    Return minus inflation.

  • Rebalancing

    Restoring the composition of assets in a portfolio or a benchmark index to a desired allocation, such as 50 % equities and 50 % fixed income.

  • Reference index

    Index against which a portfolio's return and risk are compared. Also called benchmark index.

  • Return

    Time-weighted return, excluding asset management costs, calculated on a daily basis and assuming that all transactions are carried out at the end of the day. Is used when reporting the financial performance of the portfolio and sub-portfolios.

  • Return contribution

    Shows how large a part of the return is attributable to a particular portfolio or decision. Return contributions are usually measured in percentage points. The sum of all return contributions equals the total percentage return for asset management overall or for a specific area.

  • Risk mandate

    A mandate that restricts the financial positions that may be held, by setting a ceiling for the risk the positions might cause.

  • Risk-adjusted return

    The return of financial instrument or portfolio divided by the level of risk (measured as volatility). If two portfolios offer the same return but differ in volatility, the one with the lower volatility offers the higher risk-adjusted return. This is often measured as an information ration or Sharpe ratio.

Ss

  • Scenario analysis

    A way to describe how an industry evolves and to better understand how the future should be.

  • Sector allocation

    Active overweights or underweights in different equity market sectors relative to the index in order to outperform the index.

  • Semi-active asset management

    Portfolio management carrying somewhat higher active risk than passive management; that is, indexed management with limited intervention. Also known as enhances indexing.

  • Sharpe ratio

    A measure of risk-adjusted return. Calculated as the portfolio's return minus risk-free interest, divided by the standard deviation of the portfolio. A high Sharpe ration indicates a good trade-off between risk and return.

  • Strategic allocation

    Medium-term deviations from the normal portfolio's asset allocation, foreign exchange exposure, duration and so forth aimed at enhancing the returns on and risk characteristics of the strategic portfolio. Strategic allocations are decided by the Board of Directors based on the normal portfolio and medium-term forecasts of risk and return.

  • Strategic portfolio

    The distribution of assets deemed to correspond best to AP4's long-term objectives and targets. Its composition consists of the normal portfolio adjusted for strategic allocations. The strategic portfolio thus determines the benchmark index against which the Fund's risk and return are compared.

  • Supranational bonds

    Supranational bonds consists of bonds issued by supranational entities, such as EIB (European Investment Bank).

  • Swedish equity portfolio

    Consists of equities and equity-based instruments listed on a stock exchange in Sweden or another Nordic country.

Tt

  • Tactical asset allocation

    Active position-taking between different asset categories or regions in order to outperform the index.

  • Time-weighted return

    Time-weighted return, calculated on a daily basis and based on the assumption that all transactions occur at the end of the day. This concept is always used in reporting the financial performance of a portfolio or sub-portfolio and refers to the performance before expenses unless stated otherwise.

  • Total return

    The actual return on an investment over a given time period. The return consists of income and capital appreciation. The revenues can in turn be interests, dividends and distribution on securities.

  • Tracking error

    See Active risk.

Uu

  • Unlisted

    A share that is not listed, and therefore not widely available for trading on a stock exchange or other market.

Vv

  • Value at Risk (VaR)

    A measure of risk that indicates the maximum loss a portfolio risks during a specific period given a certain statistical confidence level.

  • Volatility

    Measure of risk that indicates the maximum loss a portfolio risks during a specific period given a certain statistical confidence level.

Yy

  • Yield curve

    Graph created by plotting the market interest rates of a particular class of sequrity according to maturity.