Detailed investment strategy
Unlisted companies, so-called private equity, comprise indirect investments in funds, which in turn invest in unlisted shares.
The objective of private equity investments is to provide an average return over time that exceeds the listed stock market (MSCI ACWI) by 2 percentage points per year after all costs. Historically, this target has been achieved and total costs have amounted to just under 2.5 per cent of the invested capital.
In terms of risk, AP7 Equity fund focuses on global shares. For AP7, factor risk premium investing offers an opportunity to diversify the portfolio and lower the risk without affecting returns. Factor investing means that portfolios are created through the systematic selection of shares with specific characteristics, which are expected to result in improved risk-adjusted returns over time. Exposure to risk factors, such as quality and value, can improve the effectiveness of total risk-taking because of the low covariance between long-term risk premiums and global shares and the expectation of positive long-term returns.
Various so-called alpha sources are used to spread risk and increase returns in the AP7 Equity fund. The most significant alpha sources are alpha portfolios. In alpha portfolios, returns are generated using a “long/short” investment strategy. Long positions comprise ordinary share purchases. Short positions are taken through so-called short selling, which means shares are borrowed and then sold immediately. The sales proceeds derived from short selling are used to finance “long” share purchases. Consequently, the fund does not need to use any capital for alpha portfolios.
AP7 takes an active ownership approach to influence companies in ownership and sustainability matters. This includes the fund using its influence to blacklist companies that are involved in violations of international norms and conventions. Furthermore, the fund ensures sustainability is an integral part of investment strategy by investing in climate solutions (sometimes known as “impact investing”).
- A proportion of the diversification portfolio focuses on companies offering solutions to water problems and climate and environmental problems.
- In Private Equity, a proportion is focused on the environmental technology sector, so-called clean tech.
AP7 Equity fund is a global equity fund that invests 99 per cent of its assets outside Sweden. This means that in the short term, currency fluctuations can have a large impact on the development of the fund. Savers invest their money with AP7 for decades, and the fund has no view on the relative development of currencies over such time horizons. There is no reason to assume that the Swedish krona will either fall or strengthen against other currencies.
In short, the fund’s currency exposure is based on two decisions:
A decision not to use currency hedging for foreign investments
- Currency is not in itself an asset class and has no expected return. Currency fluctuations are a zero sum game, where the strengthening of one currency is another currency’s fall.
- For managers with a high tolerance for short-term fluctuations in value, there are few reasons for using currency hedging for foreign assets. Continuous currency hedging through futures contracts is, over time, associated with significant costs.
- The inclusion of the income pension in the analysis means that savers’ exposure to the Swedish krona is very high (between 50 and 90 per cent) over their lifetime. This amounts to such a large “home bias” that any further currency hedging in order to reduce the proportion of foreign currency would be inappropriate.
A decision to allow leverage financing to take place in USD
- Leverage is created through financial derivatives contracts in USD. Nearly all global trade in such contracts takes place in USD, which means that prices are significantly lower and liquidity significantly higher than in other currencies.
- Leverage financing in USD involves a lower currency risk and lower costs than financing in other currencies.