SWEDEN - Första AP-fonden (AP1), the first Swedish national pension fund, intends to increase its equity exposure, despite a drop in assets of SEK17bn (€1.8bn) in the first half of 2008 and a total investment return of -8%.

Interim figures from AP1 showed investment income in the first six months of 2008 was -SEK17.6bn, with the biggest loss coming from a -14% negative return on equity investments worth SEK18bn, although fixed income did yield 1.9%, or SEK1.6bn.

At 30 June 2008, AP1 had assets of SEK201.8bn, a fall of SEK16.99bn from the end of December when the total assets were valued at SEK218.8bn, as the capital inflows from the pension system and AP4's special management fund was limited to SEK640m.

The negative return on listed assets - which make up 97% of the fund's total portfolio - was -8.3%, compared to the benchmark return of -8.5%, meaning the fund's active management approach outperformed by 0.25 percentage points.

However, the fund's alternative asset portfolio - consisting of unlisted property, including holdings in AP FAstigheter, and private equity holdings - returned 1.6%, albeit the report revealed the earnings impact of the fund's "open currency positions" in the first half led to a negative return.

Interim results showed the fund's allocation as a percentage of net assets at 30 June 2008 was 37.1% in fixed income, 1.3% in cash and foreign exchange, while equity exposure was 58.4%, and alternatives was 3.2%.

The equity allocation is slightly lower than the benchmark of 60.2%, as the report revealed a new asset liability matching (ALM) study completed in the first half of 2008 concluded the fund should "raise the share of real assets in the portfolio and increase its credit exposure".

As a result, Johan Magnusson, managing director of AP1, said: "We believe that the time is right to gradually raise equity and credit exposure in the portfolio. Furthermore, the study indicates that less restrictive investment rules could improve our ability to produce high returns and benefit the entire pension system. It is therefore my hope our investment rules will be reviewed and revised."

Following the performance of the active and enhanced management approach - applied to 97% of net assets - Magnusson said "I naturally wish to continue enhancing the already positive investment environment so that we can achieve even higher returns".

That said, he warned it was equally important AP1 "strengthens our focus on the strategic asset allocation and study the potential for further diversification of the portfolio".

The fund has 61% exposure to equities, 37% to fixed income, including cash and foreign exchange, and 3% to alternatives, with an additional exposure of more than 20% to currency.

Magnusson said: "While it is obviously negative for the fund's asset value to fall in periods with bearish stock markets, this is a logical consequence of our chosen equity exposure. In fact, we need to maintain a large share of equities in our portfolio to create the high return over time that our mission requires. The analysis of the Fund's long-term asset mix that we completed this spring has further strengthened this conviction."

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