Outstanding year but challenges going forward

During 2019 AP4’s portfolio passed the SEK 400 billion mark and amounted to SEK 418.0 billionat year-end. The return for the year was very strong at 21.7% after costs, and the result forthe year was SEK 75.2 billion. This means that AP4’s return and result for 2019 are the highestsince the start of the pension system in 2001. Only the market recovery in 2009 following thefinancial crisis in 2008 generated a return in line with that achieved in 2019

The year’s strong performance in the financial markets should be viewed in the light of the very tough end to 2018, with sharply falling stock markets and rising interest rates. Over the two-year period 2018–2019, the average annualised return was more balanced at 10.2%. From a slightly longer time perspective of the last ten-year period we can affirm that AP4’s portfolio delivered an average annual return of 9.9%. If we instead look ahead, we believe unfortunately that it will be a considerable challenge to achieve an equally favourable return over the next decade. Our main scenario gives a picture of comparatively low growth in the developed countries during the coming decade. This is due to circumstances such as normalisation of monetary policies, climate adaptation, areas of high debt, demographic development and weak political resolve. On top of this we also see a risk for greater protectionist measures, heightened regional tensions and waning confidence in important government cooperation organisations like the UN and WTO, with a further, potentially negative effect on growth in the financial markets. At present we also have generally high relative valuations and very low interest rates, which indicate an expectation for negative real returns on fixed-income assets in the medium-term perspective

Significant contribution to the pension system
Since the start of the Swedish pension system in 2001, the Fund has generated an average return of 6.5% per year after costs, with an accumulated result of SEK 320 billion. During this time AP4’s portfolio has grown from SEK 134 billion to today’s SEK 418 billion, at the same time that we have paid out SEK 36 billion to the pension system. AP4’s return on top of the income index, which is the index with which the pension system’s liabilities are measured against, has averaged 3.6 percentage points per year since the start. This corresponds to just under SEK 210 billion and means that AP4 has made a significant contribution to the growth in the buffer funds’ combined share of assets in the income pension system from 10% at the start to around 15% today. AP4’s favourable historical result is due in large part to the ability to leverage the large latitude that exists in the buffer funds’ statutory mandate. Thus for example the buffer funds have unique conditions to act long-term and thereby have the opportunity to fully take advantage of the potential in investments through their ability to withstand large market movements and low liquidity where it favours long-term returns.

AP4 supports the climate goals
AP4 supports the Paris Agreement and the more ambitious Swedish environmental objective to achieve zero net emissions of greenhouse gases by 2045. One of AP4’s goals is that we will contribute to the transition to a sustainable society. For these reasons, AP4 integrates sustainability in all of its investment processes. The Fund’s sustainability strategies and thematic investments coupled to sustainability play an important role in the Fund’s asset management. AP4’s contribution to the climate transition takes various forms. One example consists of our low-carbon strategies, which we have gradually developed and broadened since they were introduced in 2012, to where today they make up a significant feature in our global equities portfolio. Via the low-carbon strategies, AP4 is reducing climate risk in the portfolio by selling its holdings in companies with large CO2 emissions while investing in companies with lower emissions as well as in companies that are contributing to the ongoing climate transition. AP4 is an active owner that continuously influences and urges companies to change over to sustainable business models and reduce their CO2 emissions. We do this by engaging with companies in dialogues – often in cooperation with other global investors. We also demand that companies report on their climate risks in a transparent manner. We want them to describe the governance and processes they have implemented along with the activities they are carrying out to manage their climate risks. By coordinating our work with other investors we believe that the prospects for influencing increase, as a larger share of ownership in the "AP4’s contribution to the climate transition takes various forms. One example consists of our low-carbon strategies, which we have gradually developed and broadened since 2012, to where today they make up a significant feature in our global equities portfolio." companies align themselves and support the dialogues. AP4 also acts formally as an owner in these issues by voting at general meetings of shareholders.

Certain additional changed rules
It is highly positive that the members of the so-called Pensions Group took the initiative a few years ago to modernise the AP Funds’ investment rules. The first step in this modernisation took effect on 1 January 2019 and gives the AP Funds greater flexibility in their asset allocation through a relaxed requirement to hold liquid fixed income assets with high credit ratings as well as greater scope to invest in unlisted assets. In December 2019 the Swedish government presented a bill laying out another step in the modernisation of the AP Funds’ investment guidelines. This step focuses primarily on giving the AP Funds greater flexibility with respect to investment forms for unlisted investments, with the aim of creating even better conditions for long-term focus and cost efficiency 

Awards for AP4
AP4 received two awards at the IPE Conference & Awards 2019 in Copenhagen: for the Best In-House Investment Team, and for Best Active Management. We were also nominated for two additional categories. We are happy and proud to receive such fine recognition for our way of working and conducting our asset management, which is inspiring and motivating for our continued asset management and development work. These awards can be credited to all of the great employees we have at AP4 who do their utmost every day to ensure the Fund’s return and performance. I therefore want to direct my warmest thanks to all of AP4’s employees, who together work successfully for our societally important mission at the same time as we work intensively to adapt our operations to future challenges.