The Normal portfolio - 40 years

Over time, the proportion of equities relative to the proportion of fixed income securities is critical to returns.

The Normal portfolio is comprised of indices

The Normal portfolio is AP4’s reference portfolio and is comprised of several different indices. It has a 40-year time horizon, with an asset allocation that is resolved by the Board annually.

The Normal portfolio reflects the mix of liquid asset classes that are expected to provide a total return that achieves AP4’s target of a 4.5 percent real rate of return, with low risk of reduced pensions. The time horizon is 40 years, and takes into consideration the investment rules governing AP4.

Equities provide good returns over time

Equities are an asset class with an expected high long-term return. Short-term, equities also have high expected volatility and, relatively, returns can be expected to vary sharply from year to year.

A high proportion of equities over time can therefore be expected to contribute to the increase of AP4’s fund capital. The resolution to have a high proportion of equities in the long-term Normal portfolio is a prerequisite for the possibility to create a high positive return over the long term.

Long-term this contributes to good value creation in the pension system and to the systems financial strength – a requirement needed to meet the pension system’s long-term commitments.

The Normal Portfolio consists of 66 percent equities, which means that AP4’s returns are largely determined by developments in global equity markets.

Since the management structure was introduced in 2013, the Normal Portfolio has positively contributed SEK 104.9 billion kronor to earnings, of which equities account for SEK 75.1 billion kronor.

Long-term perspective - 30-40-year retirement context

Longer evaluation periods are required when evaluating the performance of asset classes. Thirty to 40 years is a fair perspective in a pension framework.

Performance of equities and wages over time¹

Equities’ real return (adjusted for inflation) over the past 90 years have varied greatly. The average real global equity returns between 1924 - 2014 was 6.1 percent per year.

The real return on equities during the various ten year
periods fluctuated sharply - more than 20 percent per year (80’s) down to negative numbers in other periods. Large differences between successive ten-year periods is common.

Equities require a 35-year evaluation period in order to reasonably comparable a stable real value trend for equities with that of real wage growth, which is based on a ten-year evaluation period.

Real wage growth largely controls the income-value performance. The real wage growth in the period 1918 - 2012 was 2.1 percent per year. This is a significantly lower increase in value as compared to a capital investment in equities over the same period.

The difference between equities and real income development has been greatest during the past two to three decades, when equities real performance has exceeded the real wage growth. The investment horizon, as such, should be long-term in order to take advantage of equities positive performance over time. AP4’s has a long-term mandate and thus a long-term investment horizon.