AP3 Returns 10.8% in First Half of 2019

Despite strong returns, $38.8 billion fund underperformed benchmark.

Swedish pension fund AP3 reported a 10.8% return after expenses for its investment portfolio during the first half of 2019, raising its total market value by SEK36.51 billion ($3.79 billion) to SEK374.1 billion as of June 30, up from SEK340.7 billion at the end of 2018, and from SEK353.1 billion at the same time last year.

All asset classes earned positive returns for the fund, with equity investments making the largest single positive contribution to the returns, while the fund’s real estate investments also performed well. The fund reported five- and 10-year annualized returns of 8.6% and 9.1%, respectively.

“Equity markets recovered swiftly from the sharp downturn in the last quarter of 2018,” AP3 Chief Executive Officer Kerstin Hessius said in a statement. “Financial market risk levels dropped after the US Federal Reserve began the year by signaling a restrictive approach to continued interest rate hikes and later guided the market to prepare for cuts during the year.”

Despite the robust returns for the first six months of 2019, the AP3 portfolio underperformed by 0.8 of a percentage point its long-term static portfolio (LSP), which serves as its benchmark and consists of liquid assets. However, the fund outperformed the LSP in the second half of 2018, and for the year ended June 30.

New investment rules for the AP funds came into effect at the beginning of the year that reduced the minimum for investments in fixed income instruments with a low credit risk from 30% of portfolio assets to 20%. The funds were also given increased scope to invest in unlisted assets. As a result of the changes, the AP3 board of directors adjusted the level of risk in the LSP by raising equity risk to 55% from 50%, and raising the weight in index-linked bonds and currency exposure.

Although this didn’t alter the portfolio’s asset allocation during the period, the fund said the strength of the equity market during the first six months and the higher equity weight in the LSP were the main reasons the AP3 portfolio underperformed the LSP.

“Large holdings of unlisted assets give the AP3 portfolio a higher level of diversification than the LSP,” said Hessius. “This means that the AP3 portfolio will lag the LSP when stock markets make rapid gains. Conversely, the AP3 portfolio will outperform the LSP when stock markets fall sharply.”

The asset allocation for the fund as of June 30 was 31% in foreign equities, 19% in real estate and infrastructure, 18% in foreign nominal fixed income, 12% in Swedish equities, 9% in Swedish nominal fixed income, 5% in index-linked bonds, 4% in unlisted Swedish and foreign equities, 1% in Swedish index-linked bonds, and 1% in other assets.

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