More than 30 of the Fund’s employees are directly or indirectly involved in investment decisions. Nearly all of these belong to the five units whose task is to outperform the expected return on the strategic benchmark through active management.
Decentralized decision-making
The Board of Directors establishes the composition of the strategic benchmark and has delegated a risk mandate to the Managing Director for active management. This mandate provides scope for reallocation between and within various asset classes, position-taking in foreign currencies and allocation between internally and externally managed assets. The Managing Director then delegates the risk mandate to the portfolio managers, both internal and external.
Strategic asset allocation
The strategic asset allocation unit works from a holistic perspective, and its task is to design a portfolio that can be assumed to have the most suitable composition, risk profile and expected return for the Fund’s assets. The unit’s investment horizon is long to mid-term (1–3 years). Investment decisions, regardless of horizon, are evaluated continuously.
The unit is able to pursue opportunistic strategies that are expected to improve the Fund’s risk profile, and regularly evaluates new asset classes for inclusion in the Fund’s asset composition. The unit is also responsible for the Fund’s ALM study and performs macroeconomic and market analyses as a basis for determining when the Fund should act.
Absolute return and risk are key metrics used in the allocation of assets. Strategic asset allocation has no targets of its own for active management. The unit has four employees.
Active management units
The Fund’s active management is conducted in five units, four internal and one that is responsible for the Fund’s external managers. The goal of the Fund’s active management units is to generate a total annualized active return of 0.5 percentage points. The choice between internal and external management is determined by the individual manager’s ability to generate a good risk-adjusted return after expenses.
For every financial year, a risk budgeting process is used to determine the level of risk to be maintained by the different managers in order to maximize the probability of the Fund meeting its active return target. Most active risk is assigned to investment areas with high expected risk-adjusted active returns and low covariance with active returns in other areas.
Internal active management
The Fund’s internal active management units invest in listed securities and foreign exchange. One critical aspect of this management is the use of several mutually autonomous investment processes, all of which are based on independent and qualified analysis with a global orientation. This increases the scope to achieve a high risk-adjusted return and reduces sensitivity to unexpected events. There is consequently no coordination of positions, and investment decisions are instead decentralized in the organization. This investment philosophy ensures sufficient breadth in the Fund’s research, which rests on both fundamental research (economic indicators at the macro, micro and corporate levels) and quantitative analysis based on mathematical and statistical modelling.
At year-end internal active management was carried out in four different units that manage over 60% of the Fund’s total assets. All units have made a positive contribution to the Fund’s strong active return over the past five years. In 2008 a decision was made to change the orientation for global macro allocation, formerly one of the Fund’s active investment units, and its positions were closed on 31 May. Since that time, its employees are part of the strategic asset allocation unit.
Tactical asset allocation
The tactical asset allocation unit generates excess returns by reallocating the Fund’s assets between different asset classes and markets. The investment horizon is short, up to three months.
The unit’s investment process is driven by structured research, clearly defined rules for deciding when to execute a trade, back-testing of models and decision-making rules and the use of several parallel investment signals.
Positions are taken between the global equities, global fixed income, foreign exchange and cash asset classes. Assets are also allocated between different regions and countries within the equities and fixed income asset classes. Research is based on a combination of macroeconomic indicators, fundamental valuation and statistical analysis. The unit has five employees.
Equity management
The equity unit creates excess returns through active management of Swedish and European equities. The goal is to outperform index mainly through a combination of stock selection within sectors and allocation between sectors. The investment horizon is around one year.
The investment philosophy is characterized by systematic fundamental company analysis, sector specialization and clearly delegated management responsibility with a large degree of analyst influence.
The analysts have management responsibility for their respective sectors in the European portfolio and analysis responsibility for the Swedish companies. The Swedish portfolio is managed jointly by a team of sector analysts headed by a portfolio manager.
Stock analysis focuses on earnings growth, stock valuation and risk. The investment process is aimed at identifying stocks that are overvalued or undervalued in relation to the unit’s own earnings growth forecasts.
There is a strong emphasis on personal visits and close contact with companies, together with global analysis for early identification of new trends that affect their growth and profitability. This process is supplemented by models for factors like earnings momentum and risk analysis, as well as the use of external stock analysis.
Specialized equity traders execute transactions via both stocks and derivatives. The equity management unit has 11 employees.
Fixed income management
The Fund’s fixed income unit creates excess returns by identifying factors that can influence both the general interest rate trend and the spread between different types of fixed income securities. The investment horizon is from three to six months.
The unit bases its valuations of interest rate levels and positions on monitoring and assessment of multiple factors; economic and political trends, the market’s positioning, future offerings from various issuers and their credit ratings.
These factors are then weighted together to create an optimum portfolio designed to achieve the highest possible return with controlled risk. The unit has three employees.
Foreign exchange
Since the start in 2001, the Fund has handled foreign exchange as a separate asset class in which decisions regarding currency exposure are made independently from investment decisions relating to the underlying assets. Foreign exchange is managed a separate asset class based on the belief that specialization of investment decisions generates higher returns and makes the Fund’s risk utilization as effective as possible. With two thirds of the portfolio invested in assets outside Sweden, this management is central for total return.
The foreign exchange unit creates excess returns by taking active currency positions. It also oversees the Fund’s currency hedging operations and functions as the Fund’s treasury unit. The unit handles all liquidity and short-term interest rate management and has business responsibility for the Fund’s securities lending program. The unit has four employees.
The investment philosophy for active management is based on systematic positioning in the foreign exchange market. The systematic, model-based approach is combined with discretionary investment processes. The unit trades in some 20 different currencies and takes positions in the majority of these. In most cases, the investment horizon is up to three months.
External active management
Listed assets
A significant share of the Fund’s assets is managed externally. This is undertaken in all markets and asset classes where the internal management organization is not deemed to have the necessary conditions for competitiveness in terms of costs, efficiency and expertise. At present, these include management of non-European equities, US and European credit bonds and alternative investments.
Overall responsibility for the external managers has been assigned to a separate unit that handles tendering, performance measurement and evaluation and possible replacement of managers. The unit has five employees, of whom two work with a special focus on alternative investments.
The goal of the Fund’s external management is to generate a higher return by outperforming a benchmark index. The investment philosophy is based on a multi-manager approach, i.e. several managers are appointed for each mandate.
Diversification is a key criterion in setting the manager mix and is strived for in many dimensions, such as investment styles, approaches, risk and return targets.
It is important to select a line-up and mix of managers who together show adequate stability and good capacity to produce active returns after operating expenses.
Performance monitoring and evaluation of the managers is carried out continuously according to a systematic process. Managers of listed assets are normally evaluated on a rolling three-year basis. Other managers are monitored continuously but, for practical reasons, are evaluated less frequently.
Alternative investments
Första AP-fonden’s ambition is to successively increase the share of alternative investments in its portfolio. The Fund continuously monitors trends and opportunities in all alternative asset classes and undertakes a thorough quantitative and qualitative analysis of both asset and manager before committing to an investment. Management of alternative investments also employs a multi-manager approach and the goal is to outperform a predetermined index – but with a very long time horizon. Final investment decisions are made by the Managing Director after discussion in a special internal investment committee. The current investments consist of private equity, real estate and, to a small extent, hedge funds.
The overall investment philosophy for alternative investments seeks to exploit the fact that these markets are less efficient and transparent. By appointing managers with specialized expertise, the Fund expects to create a higher return than the market as a whole.
In order to limit risk in this asset class, private equity investments are spread between different vintage years, geographical regions, industrial sectors, portfolio company development stages and fund strategies. To a large extent, the unit uses external advisors/partners for investments in private equity funds.
Management structure, 31 December 2008
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Internal |
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External |
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|---|---|---|---|---|
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Active | Active | Enhanced | Passive |
| Allocation | • |
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| Equities, Sweden | • |
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| Equities, Europe | • |
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| Equities, North America |
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• | • |
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| Equities, Pacific and Japan |
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• | • |
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| Equities, emerging markets |
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• |
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• |
| Fixed income | • | • |
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| Foreign exchange | • |
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| Alternative investments |
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• |
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