Investment strategy
There are two sources of return: systematic exposure to risk premia and value-creating active management. AP7’s mandate is to combine these two sources over time in a way that fulfills the role of the default option and the state fund portfolios within the public pension system. In this work, AP7 is guided by investment philosophies or ”beliefs” that are divided into five categories:
- Risk-taking
- Diversification
- Risk management and strategic positioning
- Cost-efficiency
- Corporate governance and sustainability
Objectives
A continuous investment in AP7 Såfa throughout one’s working life is expected to generate a long-term excess return compared to the income pension of at least 2 percentage points per year.
Investment Strategy – AP7 Equity Fund
AP7 Equity Fund is a global fund with high risk and a clear sustainability profile. The fund’s investment approach is based on a theoretical CAPM framework and follows the development of modern portfolio theory toward factor-based investing.
AP7 Equity Fund places the majority of its investments outside of Sweden and normally does not hedge foreign currency exposure. This means that short-term currency fluctuations can have a significant impact on the fund’s performance.
Investment Strategy – AP7 Fixed Income Fund
The fund’s strategy is to invest its assets in Swedish interest-bearing financial instruments with low credit risk. To enable broader diversification within the green bond segment, investments in such instruments may also be made in currencies other than Swedish kronor. Holdings in currencies other than SEK must be hedged within the limits defined by the fund’s regulations.
A sustainable development shall be promoted, and sustainability aspects shall be integrated into the management in accordance with AP7’s climate action plan. This is primarily achieved through investments in green bonds.
Management Strategy
Long-term perspective and diversification are two pillars of AP7’s management strategy. Diversification concerns risk spreading on multiple levels – partly through investments in over 2,100 equities with broad geographical and sectoral spread. These holdings are complemented by additional diversification into asset classes such as private equity.
Since January 1, 2023, AP7 may also invest in alternative asset classes, such as real estate and infrastructure.
Diversification also occurs from a time perspective, as new premium pension capital is allocated each year, spreading investments and thus risk over an entire working life. The risk level in AP7 Såfa is also adjusted according to the saver’s age, from a larger share in equities – and thereby higher risk – for younger savers, to a growing share in bonds as retirement approaches.
Currency exposure
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.