SWEDEN - Fjärde AP-fonden (AP4), the Fourth Swedish National Pension Fund, saw assets drop SEK17.5bn (€1.8bn) in the first half of 2008, while Sjunde AP-fonden (AP7) reported negative investment returns for both the Premievalsfonden and the Premiesparfonden.

AP4, one of the five buffer funds in the Swedish pension system, revealed its total fund capital fell from SEK207.3bn at the end of December 2007 to SEK189.8bn following an overall negative investment return of -8.7% before costs, which was 0.2 percentage points below the benchmark.

The pension fund blamed the poor investment performance on external factors resulting from the current credit crisis, including rising inflation, volatile equity markets and rising energy prices.

Equities, which account for 59.6% of the portfolio, produced the lowest returns, with Swedish equities returning -16.2%, while global shares yielded -12.7%, although the 1.1% allocation to unlisted shares also achieved a negative result of -5.4%.

Interest bearing assets, equivalent to 36.8% of the fund's investments, also performed badly as it returned just -0.2%, which meant the only positive result was provided by the 2.5% allocation to property which yielded 3.2%.

However, Mats Andersson, chief executive of AP4, said: "The outcome of the first six months might seem alarming. But the picture needs to be clarified. AP4's mission is to manage the pension fund with a long-term investment and the results will be evaluated over longer periods. When looking at changes in the last five years, the overall return on average amounted to 11.4% per year - despite the very weak performance so far this year."

In the interim results, Andersson also suggested given the long-term objective of the AP-funds the basis of its portfolio should be to maintain a high level of equity holdings "even if this strategy can sometimes give rise to negative returns".

He also pointed out that the AP-funds retained a high share capital in the last period of falling stock markets in 2001-2002, "which led to the funds fully benefiting from the strong recovery that followed when the market recovered.

That said, the report highlighted the Board's strategic decision in 2008 to have a "degree of underweight in equities" helped to reduce the negative result, although the fund's active yield which measures management performance against the benchmark index - was -0.14%.

Andersson added the changes to investment strategy already implemented, or being implemented, "are beginning to bear fruit", although he admitted "the fund still has a way to go before we reach the desired goal of an annual active return of 0.4%".

Meanwhile AP7, which operates two funds in the Premium Pension System (PPM), reported negative first half returns for both investment funds.

The interim results for Premiesparfonden - the Premium Savings Fund and default fund in the pension system - showed 98% of pension savers failed to actively choose any other fund in the PPM, which increased inflows into the fund to SEK599m in the first half.

However, outflows from the fund amounted to around SEK2bn, or 2.4% of the average fund assets, with the majority resulting from pension savers switching to one of the other 800 funds in the PPM.

Although with a total market value of SEK73.9bn and over 2.5 million members, the Premiesparfonden has a market share of 28.3% in the PPM, which makes it the largest investment fund in the system.

As the default fund, the Premiesparfonden has the objective of achieving at least the same return as the average PPM fund, but with less risk, and it aims to do this with a portfolio of 82% in equities, 8% in fixed income, 8% in private equity and 2% in hedge funds.

In addition, AP7 has also adopted an alpha-beta separation strategy across both funds, which aims to provide a "clearer division of administration", with the beta aiming for a market average return and the alpha generating an additional positive return.

However the first half of 2008 resulted in an overall negative yield for the Premiesparfonden of -14%, although this outperformed the Seventh AP Fund's PPM-index which achieved an interim negative return of -16.5%.

Equity holdings produced the lowest results, with Swedish shares returning -16.8%, while emerging market shares yielded -17.4%, global shares without hedging achieved -17.1%, and private equity reported a negative return of -14.7%.

In addition active currency management resulted in -0.1%, and nominal bonds achieved a poor -2.3%, however real interest bonds yielded 2.6% and hedge funds contributed a positive return of 0.5%.

Meanwhile the Premievalsfonden - the Premium Choice Fund which functions as unit trust and can be selected in the same way as other funds in the PPM - reported an overall negative return of -15.6%.

The fund received inflows of around SEK51m, as a result of people switching from other funds, although for the same reason the Premievalsfonden lost SEK29m, which represents 1.2% of the average fund assets.

However, with more than 103,000 members and total assets of SEk2.2bn, the Premievalsfonden had a market share of 0.9% at the end of June, which makes it the 17th largest fund in the PPM.

The aim of the fund is to perform well enough so that in the current five-year period the total return from the Premievalsfonden is equal to at least the average of all the 800 funds that can be selected in the PPM, plus 0.35% per year.

The current asset allocation is 90% in equities, 50% of which are global, 20% in emerging markets and 20% Swedish, while the remaining 10% is allocated to private equity fund of funds.

The overall negative yield of the Premievalsfonden was -15.6%, against the benchmark of -15.7%, as all asset classes produced negative returns in the first half of 2008.

Global equities, without hedging, were the worst performer with a negative return of -17.5%, closely followed by emerging market shares which yielded -17.1%, while private equity achieved a negative result of -16.6% and Swedish equities returned -16.5%, which left active currency management as the best performer with a negative return of -0.1%.

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