Glossary

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 weighting 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 portfolios with liquid assets. The term is used synonymously with 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 diff erence 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 theoretical portfolios 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.

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 balance 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 change 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 value of pension assets in relation to pension liabilities. See Balance ratio.

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 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 diff erentials in yield spreads between countries in the context of an international bond portfolio.

Credit risk

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

Currency exposure

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

Currency risk

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

Derivative

Collective term for many different instruments. The value of a derivative is linked to the value of an underlying instrument. A government bond future is an example of a derivative that has 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 fi nal maturity) for a bond or portfolio of bonds. Is also known as McCauley Duration. See Modified duration.

Enhanced index management

See semi-active management.

Excess return

Arises when a portfolio outperforms its benchmark or reference index. Is the same as active return where the latter exceeds zero.

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 denominated in a currency other than the Swedish krona and for which foreign exchange risk has not been neutralised by hedging.

Fundamental analysis

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

Global equity portfolio

Consists of equities and equity-based instruments 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.

Handelsbanken Markets 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.

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 holdings mirror the composition of a designated index so the portfolio achieves the same returns as the index.

Information ratio

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

Interest rate risk

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

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, liquid 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).

Legal risk

Risk of unforeseen losses arising because of legal errors in agreements and contracts, e.g. that 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.

Long position

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

Market risk

Risk of a change in the value 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 fi xed income security as a result of a 1% parallel shift in the yield curve. Calculated by dividing duration (see definition) by the market interest rate plus 1.

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.

Operational risks

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

Outperformance

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

Passive management

Management of a portfolio so that the holdings mirror the composition of a designated index so the portfolio achieves the same returns 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.

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-adjusted return

The return on a financial instrument or portfolio divided by the level of ris (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 ratio or Sharpe ratio.

Sector allocation

Active overweights or underweights in diff erent 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 enhanced 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 ratio 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.

Swedish equity portfolio

For 2010, the portfolio consists of equities and equity-based instruments listed on a stock exchange in Sweden or another Nordic country. The benchmark in 2010 was SIX 60 for the large cap portfolio and OMX smallcap for the portfolio with small and mid-cap companies.

Tactical asset allocation

Active position-taking between diff erent 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.

Tracking error

See Active risk.

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 equal to the measured standard deviation of the return on an asset. It shows how much the return varies.

Yield curve

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