SWEDEN - The third Swedish national pension fund, AP3, has admitted it lacked the capacity to deal with the financial crisis as returns on assets fell sharply last year to create a 18.8% net loss.

AP3 saw its value fall by SEK43.9bn (€3.9bn) during 2008 to SEK181bn as a result of the world’s beleaguered financial markets.

The figures, released in the scheme’s latest annual report, represent the first declines seen by the fund since it was founded.

Although the scheme said the diversified nature of its portfolios helped temper the global financial meltdown, most of its investments suffered, with the equity portfolios posting a sizeable negative return of 25%.

Fixed income managed to stay in the black, but only just: with a positive contribution of 2.2%. The combined alternatives portfolios posted just 0.1%.

The big performer in 2008 was currency as the depreciation of the Swedish krona delivered a positive return of 6.3%.

This result justifies the scheme’s strategic moves during autumn 2008 to increase its currency exposure from 9% to 14%, though other strategic changes failed to deliver results and returned -2%.

The poor results have prompted the scheme to review processes they should follow when the fund needs to rebalance risk.

“Our primary losses in 2008 were on equity investments and credit bonds, said Kerstin Hessius, chief executive officer at AP3.

“Here, we underestimated the risk of a mass flight away. In retrospect, we should have reduced portfolio risk further to limit losses,” he added.

That said, Hessius emphasised the scale of the crisis and warned there is worse to come.

“Though well-founded, our strategy did not bear fruit during 2008: risk diversification is little help during a mass flight from risk. We can merely acknowledge that AP3’s portfolio was not designed to handle the crisis. The outlook for the near-term is unfortunately not very encouraging. We have a lot of hard work in front of us to diversify and limit risks yet further. We expect 2009 to be another major challenge,” said Hessius.

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