Alts Offset Shaky 2018 for Swedish Fund

What worked despite last year’s market volatility.

Stock market volatility put one of Sweden’s four pension reserves in negative territory for 2018, but it wasn’t all bad for the rainy day fund.

The now $36 billion AP2 lost 4.3 billion krona in 2018, offsetting H1’s 2.9% gains and dragging asset value down 1.3%. This is pretty rough from the year prior, which achieved a 9% return, growing assets to $37.3 billion. Another 6.8 billion krona was paid into Sweden’s pension system. Losses offset early gains from the first half of the year.

Although most of the losses came from “a negative stock market development on the world’s stock markets,” according to Eva Halvarsson, AP2’s managing director, unlisted assets did OK, as the alternative section of the investment portfolio reaped 7.4%.

Non-forest and agricultural real estate returned 14.7%, with forest and agricultural properties harvesting 4.1%. Venture capital investments gained 19.9%.

Chinese government bonds also did well, returning 10.2%.

“The decline in the equity portfolio was offset by a good return on, among other things, venture capital investments, real estate, and Chinese government bonds,” she said, adding that the new investment laws will grant better asset diversification and future opportunities for “continued risk-adjusted return.”

The laws Halvarsson referred to allow Swedish retirement plans to invest up to 40% of their portfolios in illiquid assets such as real estate, private equity, and certain debt securities. The old rules capped illiquid assets at 5%. The latest policy took effect last month.

The fund still has held decent returns for the five- and 10-year duration, beating its 4.5% assumed rate. AP2 returned 5.5% over five years and 7.7% over 10.

Halvarsson said the year was “characterized by an underlying strong global economy, but with turbulence in the markets due to various geopolitical plays, preparations for the changed investment rules, and continued integration of sustainability.”

She also noted AP2’s continued sustainable investments as a 2018 highlight. The fund implemented its own indexes for eco-friendly allocations. The emissions from the greenhouse gas companies in the fund’s listed equity portfolio decreased to 1.7 million tons of carbon dioxide, from 2.6 million tons in 2017. Global green bonds returned 4.7%.

AP2’s asset mix was 9.5% Swedish equities, 21.5% developed markets shares, 11% growth markets shares, 27.5% interest-bearing assets, 6.5% interest-bearing assets emerging markets, 11% real estate, 5% venture capital funds, 2% alternative credits, 3% alternative risk premiums, 2% Chinese A-shares, and 1% Chinese government bonds.

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