AP7 invests in global equities across many different industries, which is a good way to spread risk.
Our core strategy is to take advantage of returns in the stockmarket as a whole by tracking market indices rather than individual shares.
Research shows that this is a efficient approach.
How we manage risk
All AP7’s products reflect our investment and risk management approach, an approach that sets the parameters for how we invest pension savers’ capital:
- Fixed income investments risk leaving investors with a low pension.
- Retirement saving strategies should be based on a timeframe of 40 years or more.
- Investment risk should be gradually scaled back as the investor nears retirement.
- It is intrinsically beneficial to spread risk – and a global equity portfolio is the best way to achieve this.
- Active management should be measured in terms of absolute returns, not relative to an index.
- The level of risk in a premium pension plan should be aligned with the income pension scheme to ensure a combined prudent level of risk.
The AP7 Equity Fund is designed as a building block of the state’s premium pension offer and is a key element in AP7 Såfa’s lifecycle profile.
The AP7 Equity Fund’s investment strategy is to:
- Invest globally in equities and equity-related instruments with a diverse spread across multiple sectors – core portfolio
- Raise investment returns at a higher level of risk – leveraged fund
- Further raise investment returns through active management in key selected markets – alpha sources and tactical investment
The AP7 Equity Fund has a core portfolio comprised of 96 percent global equities and 4 percent private equity.
In global equities our exposure mirrors the structure of the MSCI All Country World Index. Management is passive, meaning that the portfolio structure mirrors the structure of the index as closely as possible.
The private equity portfolio consists of indirect investments in mutual funds that invest in private equity. A portion of the fund is invested in the clean technology sector.
A leveraged fund is one which uses leverage to gain a higher return than the market index. By adding leverage we raise the level of risk and create scope for higher returns.
At a normal level 35 percent of the assets of the AP7 Equity Fund are leveraged, which creates a multiplier effect of 1.25 times on every Swedish krona we invest. This multiplier applies both to ups and downs in the market. The fund obtains its leverage by investing in derivative securities.
The Board of Directors has the discretion to lower it to protect fund assets if deemed appropriate. The leverage level is reported in the interim and full-year financial statements but no information is provided at other times as doing so can be prejudicial to the investment strategy.
We use alpha sources to raise returns in the AP7 Equity portfolio. Our primary sources of alpha are pure alpha management of equities and active currency management.
Alpha equity management involves generating returns using a ”long-short” model. We take long positions via traditional equity purchases and short positions via short selling, which means that we borrow shares and immediately sell them. We use the proceeds from short selling to finance our long positions. By utilizing this model we do not need to allocate any fund assets to our alpha management.
Fixed income investments
The AP7 Fixed Income Fund is designed as a building block of the government’s premium pension offer and is a key element in AP7 Såfa’s lifecycle profile.
The AP7 Fixed Income Fund is managed in-house by AP7 fund managers.
The strategy is to invest AP7 Fixed Income Fund assets in fixed income instruments with:
- Low credit risk
- An average duration of around 2 years
- A strong bias to assets denominated in Swedish kronor
Investments in bonds are limited to those:
- Issued or guaranteed by the Swedish government or other governments with a high credit rating
- Issued by corporations in which the Swedish government is majority owner
- Issued under the Covered Bonds (Issuance) Act of 2003
A maximum 30 percent of AP7 Fixed Income Fund assets may be placed in bank deposits.
AP7 trades actively in the repurchase market on behalf of the AP7 Fixed Income Fund. A repurchase – or repo – agreement involves us selling a security to investors with the promise that we will buy it back at a fixed price at a future point in time. Income from a repo sale can be invested to generate income during the term of the agreement.
AP7 uses repo agreements to secure higher investment returns.