Letter from the CEO

Stockholm, 12 July 2019

Strong market performance, but concerns remain

The fourth quarter of 2018 was characterised by strong market concerns and falling asset prices. The growing concern and pessimism was the result of an unfortunate combination of mounting fears for a sharp slowdown of the global economy, concerns about more restrictive monetary policies among the world’s central banks, a feared escalation of trade conflicts and anxiety over significantly falling corporate earnings.

In strong contrast to this, in early 2019 these worries abated step by step. One by one, each of the concerns that had overshadowed the markets toward the end of 2018 dissipated. Only a few weeks into January the US Federal Reserve Bank completely reversed its position with a significantly changed message on future monetary policy. Trade negotiations also developed in a positive direction at the same time that the year’s first reporting period overall gave encouraging signs about corporate performance. All in all this helped reduce concerns over global growth, leading to greater optimism and strong performance for the financial markets, with rising share prices and falling interest rates.

The markets have thereafter more or less moved sideways, with relatively large fluctuations depending on the change in sentiment regarding the areas of concern that characterised the market movements in 2018 and start of 2019. And these uncertainties still essentially remain, which means that we can expect a market with periodically large movements also during the remainder of 2019.

Strong portfolio return for AP4

During the first half of 2019 AP4’s portfolio generated a return of 13.0% after costs. A large share of the return is attributable to AP4’s allocation to equities and real assets. Our allocation to fixed income instruments also made a significant contribution to the absolute return during the first six months of the year due to the sharply falling interest rates.

The return during the first half of 2019 was the highest return that AP4 has had for a single first half-year since the start of the new pension system in 2001. This is of course very gratifying, but it illustrates perhaps above all the volatile market environment that we currently find ourselves in. Measured since the start of 2018, the return has averaged 8.3% per year, but as the illustration below shows, the return has shown both ups and downs. This also clearly underscores the fact that evaluation of a pension fund must be done over a long period of time in order to be meaningful.

The active return from our asset management, i.e., the return in excess of AP4’s reference portfolio, has remained strong and was 1.7 percentage points for the first half of the year. The positive profit contribution was thus SEK 5.8 billion. With this I can proudly say that AP4 has extended the already long period of positive, active returns that we have historically shown. Moreover, this further underscores the value of broad and high-quality active management that AP4 conducts.

Continued development work

The work on identifying investment themes in sustainability is continuing with good momentum. The aim of this work is to allow us to identify investments that can generate favourable returns while contributing to the shift to a sustainable society. The major challenge is not in finding the overarching areas in which changes are taking place or need to be made, but rather first in ensuring that the analysis reaches such a level of detail that it becomes possible to understand the often highly complex interconnections that allow us to distinguish value chains or parts of value chains that are of interest from an investment perspective. After this, secondarily it is often not unproblematic to find investment opportunities that offer the desired exposure, and often the most interesting opportunities can be found in the unlisted market.

We have also continued to develop our organisation and competence surrounding illiquid and unlisted investments. This is an important area for AP4 in order to be able to further enhance the return potential and robustness of our investment portfolio. As I mentioned above, often the most interesting sustainable investment opportunities are found in the unlisted part of the market. An exciting and promising example of such a sustainable and unlisted investment that AP4 made during the first half of the year is Meridiam Infrastructure Africa Fund, which focuses on infrastructure investments in renewable energy, the environment and transport in selected countries in Africa. The fund thus aims to contribute to societal development and the build-up of sustainable infrastructure and is expected to generate a favourable return for AP4.

Important changes in the AP Funds’ investment rules

A memorandum regarding the second step in the modernisation of the AP Funds’ investment guidelines has been sent out for a circulation review. The memorandum mainly addresses the way in which the AP Funds will be allowed to invest in illiquid assets. The stated purpose of the legislative change is first to give the AP Funds the best possible conditions to increase cost effectiveness,
return potential and long-term perspective regarding investments in illiquid assets, and second to give the AP Funds equal conditions as other, comparable institutional investors.

Unfortunately, the proposals set forth in the memorandum entail continued significant limitations for the AP Funds on investments in illiquid assets. Thus the conditions for achieving the purpose of the legislative change would not be achieved. We have therefore in our response to the memorandum’s review once again asserted that the AP Funds should be given expanded opportunities for direct investments in unlisted assets such as co-investments and side investments in unlisted companies, investments in unlisted infrastructure companies, and investments in unlisted credits.

This would complement the first step of the changed rules that took effect at the start of the year and also enable long-term and cost-effective unlisted investments with the same conditions that apply for other large pension funds. It is urgent to now create a set of rules that give the AP Funds sufficient flexibility to be able to operate in a rapidly changing financial market for many years into the future.

In closing I want to thank all of AP4’s employees, who in their various roles together have contributed in part to the very strong asset management result and in part to our work on continuously developing our operations so that we can perform our important mission in the Swedish national pension system in the best way possible.