The final two of Sweden’s six national pension funds have published their 2023 reports, with premium pension default provider AP7 revealing a near 20% return for its equity fund, and private equity specialist AP6 complaining that inappropriate currency hedging rules held back new co-investments.
Stockholm-based AP7, the largest of the six AP funds, reported an 18.4% overall return on its capital, which grew to SEK1.106trn (€99bn) by the end of 2023 from SEK905bn a year before.
AP7’s lifecycle default product, named Såfa, makes up 95% of its capital.
“During the same period, the private premium pension funds on average gave a return of 16.7%,” AP7 said in the report.
This difference in returns was partly down to AP7’s investment alternatives overall having a higher stock market exposure and currency exposure than did the private funds offered within Sweden’s defined contribution, first pillar premium pension system, it said.
The main building block behind Såfa – the equity fund – produced a 19.9% gain in 2023, with the smaller bond fund returning 5.3%, AP7 said.
AP7’s new chief investment officer, Lena Fahlén, who started in the role in September, said the strong growth of AP7’s assets under management in recent years, coupled with the new mandate the fund had been given – which allows investment in real estate and infrastructure, for example – and ambitious sustainability goals, meant AP7 had to develop its management.
“We are reviewing and modernising our investment processes, we are developing a strategy for alternative investments and have ambitious plans to integrate sustainability even more into our management,” she said.
Separately, AP6 reported a 3.0% return in 2023, up from 1.9% the year before, according to its annual report, with assets under management having grown to SEK70.7bn during 2023 from SEK68.6bn.
Katarina Staaf, AP6 chief executive officer, said: “The private equity market has slowed down. During the year we invested nearly SEK1bn in co-investments and around SEK4.5bn in fund commitments.”
“That is conservative from our perspective and demonstrates the consolidation that we are working on and that we expect to create a good basis for an even stronger portfolio structure in the years ahead,” she said.
The Gothenburg private-equity specialist reiterated its criticism of the rule that it has to hedge currency exposure.
“The statutory requirement of currency hedging, which is not appropriate for its purpose, caused AP6 to be very reticent about making new co-investments in 2023 since the liquidity had to be utilised for currency hedges,” it said.
AP6 was a closed-end fund, it said, and the legislator knew it could not extract liquidity on an ongoing basis in the same way as other AP funds.
“Requiring extensive currency hedging has a major impact on liquidity in times of volatile exchange rates,” the fund said.
Staaf commented on the Swedish government’s new review of the AP funds — a plan which seems set to merge AP6 with the larger Gothenburg-based buffer fund AP2.
“It is obvious that modernisation is needed, and the currency hedging requirement for our investment portfolio is a clear example of that,” she said.
“Whatever the solution chosen, we anticipate that AP6’s sound expertise, structural capital and successful strategy within private equity will be taken into consideration,” the CEO said.
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