At year-end 2008 the Fund had assets of SEK 104 billion under internal management. This is equal to 60 percent of total net assets, and can be compared to the previous year’s figure of 64 percent. The assets were invested in listed securities, both Swedish and non-Swedish. At the beginning of 2008, five units were responsible for the Fund’s active management; global macro allocation, tactical asset allocation, fixed income, foreign exchange and equities. In the spring, global macro allocation was merged with the new unit for strategic asset allocation.
Over the past five-year period, internal active management contributed an average of 0.3 percentage points annually to the Fund’s total return.
Global macro allocation
Global macro allocation closed its positions on 31 May and was merged with the new unit for strategic asset allocation. Active return for 2008 was -0.25 percentage points. The underlying assumption behind position-taking in the spring of 2008 was that the global economy was headed for recession and that the central banks would react by slashing key interest rates. However, surging raw material costs in the spring sparked inflationary concern among the central banks rather than fears of economic slowing. Furthermore, exchange-traded short-term interest rates climbed in pace with rising risk premiums in the banking system. Higher short-term interest rates in the spring and the banks’ widened interest rate gap against treasury bills were main factors behind the unit’s negative investment return.
Tactical asset allocation
In 2008 the tactical asset allocation unit made a negative contribution of -0.26 percentage points to the Fund’s active return. A large share of the unit’s return arose in the latter half of the year when market swings were unusually huge, leading to a higher level of risk than anticipated. In particular, costs for daily maintenance of the Fund’s position relative to index, rebalancing and currency movements detracted significantly from return under the prevailing volatile market conditions. The year’s discretionary decisions made a negative contribution, while model-driven asset allocation delivered a return of around 0 percent.
Equities
Internal equity management is divided between two mandates, one Swedish and one European.
Swedish equities
At year-end 2008 the Swedish equity portfolio amounted to SEK 18.0 billion, a decrease of SEK 9.8 billion. The decrease is mainly due to negative development in the stock market.
A first half year of positive returns was followed by a second half when the portfolio underperformed index. For the full year, the Swedish equity portfolio delivered an active return of -1.3 percentage points relative to index, after three consecutive years of above-index returns. The lower return is related to a turbulent period from September to November when the stock market fell sharply and market risk rose to historically extreme levels.
In this highly volatile market, relatively small over- and underweights led to significant variations in relative returns. Overweights in SSAB and ABB were reduced during the summer, but not enough to prevent a loss in the latter half of the year. The portfolio was also underweighted in Investor and Assa Abloy, which performed better than the stock market in autumn 2008. An overweight in Swedbank made a negative contribution that was partly compensated by underweights in SEB and Nordea, both of which underperformed the stock market during the autumn. Overweights in the telecom service providers Tele2 and TeliaSonera and the medical technology company Elekta contributed positively, as did a cautious stance toward construction companies. At year-end the portfolio contained some 50 companies.
Largest Swedish equity holdings, 31 Dec. 2008
| Company | Market value, SEK m |
% of Fund’s net assets |
|---|---|---|
| Hennes & Mauritz | 1,999 | 1.2 |
| TeliaSonera | 1,728 | 1.0 |
| Ericsson A and B | 1,659 | 1.0 |
| Nordea | 1,291 | 0.8 |
| Volvo A and B | 877 | 0.5 |
Largest voting rights in Swedish holdings, 31 Dec. 2008
| Company | Market value, SEK m |
% of votes |
|---|---|---|
| TradeDoubler | 56 | 5.3 |
| Oriflame | 176 | 1.4 |
| Atlas Copco | 804 | 1.0 |
| Elekta | 85 | 1.2 |
| PA Resources | 19 | 1.1 |
European equities
At the end of 2008 the Fund had European equities under management for a value of SEK 21.6 billion, a decrease of SEK 9.4 billion compared to 2007. The value loss is mainly explained by the negative trend in the equity markets.
2008 was characterized by two periods with very different effects on the equity market and active return. The first half of the year was well matched to the Fund’s investment philosophy based on stock selection within and allocation between sectors, which resulted in a positive active return. After mid-year, however, active performance was inhibited by a combination of significantly increased correlation between equity returns and higher volatility. The recovery that took place in the fourth quarter was not sufficient to offset the rapid fall in late summer, a pattern that was repeated in all sector portfolios. The strongest sector was Financials, which outperformed index. Industrials matched index return, while the other four sector portfolios underperformed. The total portfolio produced an active return of -0.6 percentage points in relation to index.
Fixed income
At year-end 2008 the Fund’s fixed income portfolio amounted to SEK 67.1 billion, a decrease of 21 percentage points or SEK 17.6 billion compared to 2007. The drop in value is mainly due to internal reallocation in the total portfolio. SEK 57.9 billion, or 86 percent, of the fixed income portfolio was managed internally.
The portfolio delivered an active return of 0.35 percentage points relative to index.
Widespread uncertainty about economic development in the USA and its global spinoff effects created turmoil in the financial markets and led to high volatilty. A cautious strategy was chosen through an underweight in externally managed corporate bonds. The assessment was that investments of this type would yield lower returns than treasury bills. Parallel to this, a relatively high share of index-linked bonds was chosen. Together with positions for rising interest rates, this made a positive contribution to the portfolio’s active return in the first half of the year. When the financial crisis escalated in the autumn, liquidity in the second hand market dried up and caused volatility to rise. Credit and liquidity premiums widened at the same time that transaction costs rose. It become more difficult to pursue new strategies in the portfolio and part of the positive active return was lost in the last few months.
Foreign exchange and treasury
Första AP-fonden’s foreign exchange unit and treasury contributed positively to the Fund’s total return. The foreign exchange unit’s active currency positioning and currency hedges added 0.18 percentage points to the Fund’s total return, while securities lending made a negative contribution of -0.1 percentage points.
2008 was an extreme year in all asset markets, which had a severe impact on the foreign exchange market. Exchange rates are a translation factor for global asset prices, and affect buying power between nations and the opportunities for companies to export their goods and services. In the first half of the year, slowing in the US economy, falling key interest rates and the country's massive trade and budget deficits made investors shy away from dollar exposure and caused the US dollar to weaken against all major currencies.
Amid growing unrest in the global asset markets during the second half of 2008, investors pulled their capital back home to Europe, the USA and above all Japan. The US dollar gained against all currencies except the Swiss franc and Japanese yen, which both climbed even more strongly. The UK suffered the effects of a shrinking financial sector and was the G10 currency that fell most sharply during the year. Against the US dollar, the yen gained 24 percent while the British pound lost 27 Percent. The change against the euro was only a few percentage points. The Swedish krona is one of the small currencies that face difficulties in a climate where investors seek to reduce foreign exchange exposure. The krona fell by 13 percent against the euro and was traded at a low of 11.4 in December.
Liquidity in the markets for both foreign currency spot and futures trading decreased dramatically during the year. Although the US had the year’s lowest key interest rate, a shortage of capital in the market has made the cost of borrowing dollars higher than for several other currencies.
The foreign exchange unit’s active currency positions and currency hedges added 0.18 percentage points to the Fund’s total return. The unit applies a systematic and quantitative approach in its positioning, combined with discretionary decisions. The business model is based on diversification and spread of risk between currency areas, with daily adjustment of positions. The unit showed relatively even earnings performance throughout most of the year and several different positions contributed to the positive return.
The unit is also responsible for the Fund’s securities lending, for which the Fund has chosen to delegate program management to its custodian bank. While the underlying lending component made a positive contribution, one of the investments in the collateral reinvestment component was made in a security with a credit rating of “A”. The Fund’s assessment is that this holding will give rise to a credit loss that caused the securities lending program to detract -0.10 percentage points from the Fund’s return.
