Letter from the CEO

In connection with this report as I leave my position at AP4, I note that during my ten year tenure as CEO of an AP Fund there has been a fair share of crashes and crises. But we have also developed various strategies in order to exploit the volatility of the financial markets in an environment where participants tend to become increasingly short-term. Daring to have a long-term perspective has been a successful strategy for AP4 and has allowed us over the years to create good returns for our customer - the Swedish pensioner.

The first half of 2016 came to a dramatic end. The announcement the morning of Midsummer’s Eve surprised many: A majority of Britain had voted to leave the European Union - the so-called "Brexit". The announcement sent shock waves through global stock markets and the increased uncertainty initially led to large price declines and sharp fluctuations for the currency markets.

Should we be worried about Brexit?

Short term? - Yes. There is no one who currently can have a well founded view on how and for how long Brexit will affect the world economy.

Medium term? – Yes.  The fear is that uncertainty surrounding the Brexit will persist. Negotiations for a British withdrawal could last several years.

We know little about the agreements that might be reached and whether other countries might suffer from the same sort of change in public-opinion about the EU.

Long term? –  the natural starting point for an asset manager such as AP4– No. My firm belief is that the world economy will get through this crisis too. This, at least, is the lesson that history has taught asset managers like AP4. Let me point out some telling examples.

In the midst of the financial crisis of 2008 the legendary American investor Warren Buffet predicted that the world would not collapse this time either. And he was right. We can now say that despite two world wars, the Great Depression of the 30s, a dozen recessions, shocks in oil prices and other turbulence, the Dow Jones index has climbed from 66 to over 17,000 since 1900. The announcement that Britain would leave the EU will probably be seen in the same light.

The AP Funds in a long-term perspective

It might be difficult to grasp a 100-year perspective, but let’s restrict it to AP4’s history. Short term, 1974 was not the best time to start a pension fund with a focus on equities. After seven years, in the wake of the first oil crisis and structural problems in Swedish industry, the market value of the Fund’s portfolio was below the acquisition cost. But 40 years later we can conclude that the long term perspective won again - and by a wide margin. Over the last 40 years the Stockholm Stock Exchange has returned 14.5 percent per year, or in real terms 10.2 percent.

The same conclusion, that equities generate good returns over time, can be drawn if we shorten the perspective to the 2000’s and more precisely since the "relaunch" of the Swedish AP Funds in 2001. This also proved to be very unfortunate timing: world stock markets plummeted as a result of the dot.com crash and the September 11 terrorist attacks in the US. But once again the world economy bounced back and the AP Funds have since 2001 delivered a total return well in line with the tough targets that have been set!

Long-term perspective important to a successful decade

Maintaining a long-term perspective has been a critical success factor for AP4 the past ten years. This has benefited returns in both the allocation of asset and the choice of strategy. The long-term perspective has also served as a beacon at the crucial crossroads AP4 has crossed.

Let me give some examples.

  • Large proportion of equities

For a long term asset manager like AP4 short-term volatility is a poor measure of risk. We can bear equities risk even when price fluctuations from time to time are significant. Over the last ten years we have maintained close to 60 percent of our assets in listed equities. This risk exposure has paid off well during a time when many market participants have chosen to reduce the equity allocation in their portfolios. Equities have once again, over a longer time period, delivered good returns even though the ups and downs occasionally have been like of a roller coaster ride.

  • High exposure to Swedish equities

 A third of AP4’s equity portfolio is currently invested in the Swedish equity market. It is a decision that has been questioned by many - many times. Our rationale is based on the fact that over time Sweden has clearly delivered better returns than the rest of the world. I would argue that this phenomenon is due to the combination of a good corporate governance model and a large element of successful so-called control shareholders. Since 2001 the strategy to have an overexposure to Swedish equities has contributed close to SEK 23 billion.

  • Active management

A clear trend the past ten years is that pension funds globally are increasingly abandoning the ambition to pursue active management and instead choose passive index management. My belief has always been that over time fundamental active management pays off. Active management also creates the best basis for being a well-informed and engaged owner of the companies we invest in. With pride I can say that since the financial crisis of 2008 AP4’s talented portfolio managers have generated an additional contribution to the AP4’s capital of close to SEK 8 billion and, in this context, at a very low cost.

  • Take advantage of the long-term mandate

As mentioned, capital market participants over the past decade have become increasingly short-term. The Board of AP4 has chosen the opposite strategy. In order to better take
advantage of investment opportunities the Board introduced a strategic mandate where the evaluation horizon is up to 15 years - and I would venture to say that there are few asset managers with a similar mandate. After three years AP4 has nearly a third of its capital, and an even greater proportion of its active risk, invested in this mandate. And so far it has been very successful. AP4 has managed to create additional returns of close to SEK 17 billion since the mandate was implemented.

  • Think sustainable

The strategic mandate incorporates AP4’s sustainable investments. We all know that the world is facing a number of major global risks and global warming is perhaps the most controversial. As investors it is natural to examine how we can contribute to a more sustainable world long term. AP4 has, together with a number of the world’s largest pension funds, developed strategies aimed at significantly reducing the carbon footprint of our investments. So far we have been successful in two dimensions: the carbon footprint has decreased while returns are positive.

Overall, I think we can look back on a decade of success. The staff of AP4 have contributed to AP4 evolving from being the smallest AP Fund to, by year-end 2015/2016, becoming the largest.

Returns over the past ten years have on average been 6.8 percent on a yearly average, which corresponds to a real, inflation adjusted, return return of 5.7 percent. This clearly exceeds the long-term goal of a real return of 4.5% per year. We have achieved this with very low costs. AP4’s total costs amount to only 0.1% of the Fund’s capital annually.

And now I hand the baton over to the new CEO, Niklas Ekvall. It has been a great privilege for me to develop AP4 together with an amazing group of dedicated employees.


Mats Andersson, CEO