Increases returns and reduces risk
Strategic management represent 32.9 (30.2) percent of AP4’s investment assets. This corresponds to SEK 110.0 (93.6) billion.
Since the start in 2013, the Strategic management made positive contributions to earnings annually. During the period, the total contribution amounted to more than SEK 21.6 billion. Strategic management also contributed positively by lowering the risk in AP4’s assets while increasing returns.
The investment horizon is 3-15 years. A shorter time horizon is deemed to create restrictions on the management, which can lead to a worse result due to, among other things, the assets considered relatively illiquid; it may be difficult with too short time horizon to sell or buy these assets without having the price negatively affected. The evaluation period for the Strategic management is five years and a full evaluation period will be attained at the end of 2017.
The Strategic management investments include: real estate; AP4’s overweight of Swedish equities and fixed income securities; Swedish small cap portfolio; and various sustainability strategies such as AP4’s low carbon strategies.
Real Estate contributes positively
AP4’s real estate investments are managed in the Strategic management. The market value of the real estate portfolio, which consists of several different mandates, including a publicly listed mandate with a focus on Swedish publically listed real-estate companies. The market value at year-end was SEK 28.9 (22.7) billion, of which the listed real estate mandate amounted to SEK 4.4 (2.2) billion. Since the management structure was implemented, real estate has contributed positively with SEK 9.8 billion.
Overweight in Swedish equities contributed positively
For several years, AP4 has held a position in Swedish equities representing an overweight.
The holdings in Swedish equities has contributed positively by SEK 6.5 billion since 2013, and the assets amounted to SEK 63.3 (57.4) billion at year end, representing almost 19 percent of the assets. This corresponds to an overweight of 18 percent relative to the Normal Portfolio, which is the Strategic
management’s benchmark portfolio. The Normal portfolio uses a global stock index, where Swedish equities account for one percent. The overweight in Swedish equities was the largest strategic management position.
The position in Swedish equities is based on AP4’s conviction that over time the Swedish equity market will develop better than equity markets globally.
Swedish equities provide good returns over time
The Swedish equity market has performed relatively better than many other markets over time. One explanation for this is a combination of: a well-functioning economy/social structure; a sound Swedish Companies Act; self-regulation through the Swedish Code of Corporate Governance; and a clear governance model regarding the division of responsibilities and authority for Swedish listed companies. Even the considerable element of major owners in Swedish listed companies, and the responsibility and engagement by institutional investors in companies, is believed to contribute to Sweden’s relatively good market performance.
The Swedish equity market also exhibits higher volatility than many other markets, which given the overweighting in Sweden means AP4’s performance from year to year can be volatile. However, this is judged to be manageable and is outweighed by the expectation to generate relatively higher returns over time for the Swedish pensioner given AP4’s long-term mission and investment horizon.
Fixed income - a strategic overweight
For several years, AP4 has maintained a strategic overweight in fixed income securities, which since the inception of the management structure has made a positive contribution of SEK 0.9 billion. The overweight in fixed income securities amounted to SEK 42.6 (42.0) billion at year end, equivalent to 12.7 (13.6) percent of AP4’s assets. AP4 believes that long term the fund will achieve better returns by allocating capital to fixed income securities with good credit ratings such as government bonds.