High quality at low cost

A cost-effective management increases the likelihood of achieving the long-term return target. AP4's long-term goal is to create maximum sustainable returns after expenses. High quality at low cost is a guiding principle for AP4.

Low and competitive costs

The management cost, including and excluding commission expenses, is in domestic as well as international comparisons low and very competitive. In 2016, AP4 conducted an independent survey of the operation’s cost efficiency. Cost Effectiveness Measurement Inc. (CEM) developed the methodology used to measure and compare, from an international perspective, the cost effectiveness of pension funds.

The independent measurement takes into account several parameters such as the proportion of external management, active management, asset selection and allocation of the asset class and fund size. A reference for the evaluation of AP4’s cost effectiveness was obtained through a compilation of 18 global pension funds with a size corresponding to AP4 and domiciled in the US, Canada, the Netherlands, Finland, the UK, Australia and New Zealand.

The results exhibited AP4’s high level of cost efficiency - with costs that were 59 percent lower compared with the median of the peer group pension funds. Even after adjusting for asset allocation and fund size, AP4’s costs were 40 percent lower than the median for the peer group. The main reason is that AP4 pays less for both the external and the internal management.

Good risk diversification

Good risk diversification is required to achieve high sustainable returns, which is created by investing in different asset classes and investment strategies, among other things. The cost of these varies greatly, partly due to the selection of asset classes,
management structure, policies and the degree of active management, investment complexity and liquidity.

Costs 0.10 percent of the capital

AP4’s overall management costs amounted to 0.10 (0.11) percent, measured as a percentage of average fund capital. Management costs consist of operating expenses and commission costs. Commission costs consist mainly of fees to external managers and custodian costs.

Low management costs over time



Operating expenses ratio 0.06 percent

AP4’s operating expenses ratio, measured as operating expenses as a percentage of average fund capital, was a low 0.06 (0.06) percent. Operating expenses consist primarily of personnel costs, IT costs (which include Information, analytical, trading and
control systems) and costs for premises.

AP4’s operating expense ratio during the past five years decreased by 0.02 percentage points.

However, since 2011, in absolute value, operating expenses increased by SEK 16 million, corresponding to an annual growth rate of 1.7 percent. During the same period, AP4’s assets under management increased in value by more than SEK 100 billion to SEK 334 billion. This corresponds to an annual rate of ten percent of the assets managed.

Internal management

AP4 strives to internally manage assets when it is deemed cost-effective – in other words, AP4 can generate equal or higher returns for the same or lower cost than externally managed assets provided that there are suitable resources, expertise and experience internally at AP4.

A larger proportion of internally managed investments partially leads to increased operating costs because some costs are related to the volume of assets under management. Such costs relate to, among others, certain IT systems and index expenses and staff costs to manage increased transaction volumes. This increase in operating cost is offset by reduced commissions fees for external management.

The goal is to sustain cost effective operations, which over time contributes to the objective of maximum sustainable returns after expenses.

Legal requirements - procuring external management

AP4 has a legal requirement that at least ten percent of the assets are managed externally, and on average about 19 percent of the assets have been externally managed over the past five years. These externally managed assets include equity funds as well as customized mandates, so-called discretionary management. AP4’s investments in private equity funds are not included when calculating the statutory requirements.

"Win - win" for successful external management

AP4 pays a management fee for external management of, for example, listed shares. This is typically in relation to the total capital managed. These external management fees are recognized under Commission expenses in the Income Statement.

AP4 benefits when externally managed assets have a positive value appreciation. However, it also means, that in monetary terms, AP4 pays more in commission fees given the correlation of external management fees to the total assets under external management. Therefore, commission-fees paid to an external manager increase when the assets managed increase in value, while fees decrease if the assets managed decrease in value.

AP4 strives to negotiate a low rate as possible for the selected management strategy for an assessed maximum risk-adjusted return. The lowest absolute cost is not always an accurate measure. As previously mentioned, costs are controlled to some extent through the selection of asset classes and management strategy. The goal is to achieve a high risk-adjusted return after expenses.

Commission expenses increased with capital growth

AP4’s commission cost ratio, in other words external management costs, in relation to the managed capital is 0.04 (0.04) percent, which is low relative to comparable funds internationally and nationally.

AP4’s capital has increased in value by over SEK 100 billion over the past five years, equivalent to an annual increase of ten percent. Commission expenses are directly related to total value of externally managed assets, which have, over the same period, increased by over 20 percent per year. Commission expenses are therefore an increasing share of AP4’s total management costs.

The analysis of AP4’s external management costs in absolute numbers SEK, rather than as a percentage of fund assets, shows that commissions fees increased from SEK 24 million in 2011 to SEK 132 million in 2016. This represents an annual increase of 40.6 percent over the period. The increase is mainly due to value growth of the externally managed assets and conveys that a greater degree of active external management costs more.

Fees for external management

The level of commission fees differs depending on the external management procured. This is due in part to asset classes, markets, strategy and the degree of active management. Costs vary depending on the historical success of the external managers or whether they offer a relatively unique management; it can also depend on AP4’s requirements of the management and their service. In negotiations with external managers it is an advantage to be a long-term and large manager, like AP4.

The evaluation of external management includes an assessment of the expected risk-adjusted returns after expenses and the risk diversification the external mandate can contribute to AP4’s total asset portfolio.

Transaction costs have decreased

Securities transaction costs for AP4’s internal management, such as brokerage fees, have increased at a lower rate than the value growth of the assets. Securities transaction costs are therefore only a minor part of commission fees, while the number of transactions has increased. This is partly due to electronic securities trading and that competition has forced a downward pressure on brokerage fees.

The securities transaction costs for the internal management are reported under Custodian fees.