Letter from the CEO

There are very few countries that can claim they have a public pension system of the quality and strength that we have in Sweden, and I look forward to once more contributing to the strengthening of the pension system by developing themanagement of its buffers capital.

I assumed the role as AP4’s CEO October 1, 2016. A fact that means I in no way can take credit for the strong efforts and results that AP4 has delivered during most of 2016, and for prior years. For this reason, I would like to begin with a big thank you to the previous management, the Board and the entire staff of AP4.

Being the CEO of a National Pension Fund is an extremely exciting, challenging and stimulating assignment. It is also a highly responsible task to contribute to the safe and sustainable pensions for all individuals connected with the Swedish public pension system. Consequently, I was very happy and honoured when the Board of Directors offered me the position of CEO - an assignment that I also feel an immense respect and humility for.

This is my second time working within the AP Funds. In the early 2000’s I helped to build up one of the AP Funds in connection with the reform of the public pension, Allmän Pension. Now that I again have the privilege to see the system from the inside, I am pleased to say that the AP Funds have continued to develop in a very positive way. All the AP Funds have outstanding management founded on international standards. In addition, each fund has chosen to implement the mandate in various ways, yielding the diversification that the legislation sought to achieve. This, together with the structure and the built-in stability of the Swedish public pension system, is something we should be proud of.

Strong results

Earnings were strong in the past financial year, 2016. The return on our investment portfolio amounted to ten percent after expenses. This corresponds to a profit of SEK 31 billion and a fund capital that reached SEK 334 billion at year end.

Including the 2016 contribution, return since inception January 1, 2001, amounted to 5.9 percent per year after expenses - surpassing with a substantial margin the 3.0 percent that was the annual increase in the income index during the same period. In real terms, AP4 has returned 4.6 percent annually since start, which exceeds the long-term target of 4.5 percent. The historical performance should also be seen in the perspective of the very turbulent periods AP4 has experienced since its inception, including an IT bubble (2001/2002), a financial crisis (2007/2009), a debt crisis (2010/2011) and then a period of extraordinary monetary policy.

AP4 has a strong focus on managing capital as cost-effectively as possible. However, it is not relevant to analyse the cost base in isolation. What is important is what you gain from the investment in the operations – that is to say, long-term returns after expenses. Alternatives in implementing the management mandate can mean significantly different cost bases, but also different return potentials. That said, for 2016 AP4’s expenses amounted to 0.10 percent of managed assets, which is competitive in comparison with pension funds with similar mandates in Sweden and abroad.

The First - Fourth AP Funds collaborate in a variety of areas to jointly develop and enhance the AP Funds as cost effectively as possible. In 2016, the level of ambition for cooperation was further increased. Among other things, a council for cooperation was established with a firm mandate from the CEOs of the respective AP Fund’s.

Return, long- term approach and sustainability

AP4’s historical results is to a significant extent due to the ability to exploit the degrees of freedom available through the mandate AP4 has received through legislation. Many regulations and other structures currently compel many investors towards increased short-termism. In this respect, the AP Funds have an almost unique mandate. The long-term approach gives AP4 the opportunity to fully capture the potential of investments with the perseverance to withstand volatility when that promotes long-term returns.

In addition to the choice of time horizon, legislation also provides AP4 degrees of freedom when selecting asset classes and the portfolio structure. This gives the fund good potential to use the powerful tool of diversification, which over time creates good stable returns. AP4 intends to further increase the ambition by establishing an investment philosophy and building an investment portfolio that takes full advantage of the opportunities that our mandate and assignment offers. Among other things, an overall grasp of the aggregate portfolio will be employed to strengthen and broaden expertise to enhance the ability to generate investment opportunities with a long- or medium-term horizon.

A very important factor for success for AP4 is to further build and strengthen our culture to succeed in keeping and attracting the most qualified specialists, who also feel a social responsibility.

The integration of sustainability aspects - such as ethics, the environment and social responsibility - in the management is a necessity for a long-term investor to correctly assess potential returns and risks of different investment options. For AP4 integration of sustainability is work-in-progress in which the importance of various sustainability factors changes rapidly and great emphasis will be placed on continuing to broaden and develop AP4’s sustainability efforts.

Climate change is an important and highlighted focus area within sustainability and receives major focus by AP4. Since 2012, AP4 has established a global low-carbon strategies platform comprising three internal and three external managed low-carbon mandates. Currently, AP4 has 24 percent of the global equity portfolio invested in low-carbon strategies. The goal is to further reduce climate risk in the assets by both increasing investments in terms of volume and by looking for new effective strategies that strengthen companies’ incentives to reduce their carbon footprint.

Another important focus area is corporate governance, which is an important tool to form and safeguard shareholder value. During 2016, AP4 was very active within this area. For example, AP4 worked in 27 nominating committees, participated in 100 Swedish AGM’s and voted at the general meeting of 798 foreign companies. Through our corporate governance work we conduct dialogues with companies in a variety of areas that varies depending on what is important for the specific company.

Our corporate governance work is also an important channel to influence in terms of sustainability.

Successful portfolio management is a knowledge-intensive business. To succeed in our mission, AP4 must able to attract, develop and retain people with great skills and potential - a culture with a deep desire to develop and be constantly at the forefront is a prerequisite for this ambition.

Finally, I want to again emphasize how pleased and honoured I am to be CEO of AP4. Being the CEO of an AP Fund also means a great responsibility that I have considerable respect for. I, together with all AP4’s employees, will do our utmost to live up to the trust we have been given. 2017 will be a busy year for AP4. In addition to maintaining full focus on the management mandate in a difficult macroeconomic and geopolitical environment, a lot of energy is devoted to updating AP4’s strategy to broaden the element of long- and medium-term positioning, as well as to expand the sustainability element in the investment portfolio.


Niklas Ekvall, CEO