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Diversification and Alternatives Pay off for the AP Funds

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Stockholm (HedgeNordic) – Sweden’s four buffer funds, the First, Second, Third, and Fourth AP Fund, reported record combined profits of SEK 316 billion in 2021, after earning an average return of 19.3 percent after expenses. However, the following year proved to be challenging for the four AP funds, as both equity and fixed-income investments significantly impacted their performance. Fortunately, their allocations of alternative investments – both listed and unlisted assets – acted as a stabilizing force in their overall portfolios.

The buffer funds, also known as the AP Funds, play an essential role in the Swedish pension system. Their main task is to manage the buffer capital for the state income pension system. Currently,  the buffer capital constitutes in and around one-seventh of the pension system’s assets and is used when annual contributions to the system fall short of disbursements. Although each fund operates independently with separate management plans, investment, and ownership policies, AP1, AP2, AP3, and AP4 all share the common objective of managing about 15 percent of the pension assets.

Starting from 2019, new investment guidelines were implemented for the AP Funds. The maximum allocation to illiquid assets was raised to 40 percent, removing the previous restriction of a maximum of five percent for unlisted or illiquid assets. This change enabled the funds to choose from a broader spectrum of opportunities in alternative assets, particularly unlisted assets. Their allocation to alternatives, including unlisted assets, proved beneficial in countering losses in equity and fixed-income investments during the challenging market conditions of 2022.


AP1, which oversees SEK 421 billion in assets under management as of the end of 2022, invests in several classes of assets, mainly equities and fixed-income securities, but also allocates 28.6 percent to alternative investments, such as real estate, infrastructure, and private equity. Despite the positive contribution from its portfolio of alternative investments, negative contributions from fixed-income and equity investments resulted in a negative return of 8.6 percent in 2022.

“Diversification allows improved, risk-adjusted returns and successful diversification requires deep understanding of the forces underlying and driving investments.”

AP1’s allocation to real estate, which stood at SEK 74.4 billion at the end of 2022, returned 7.4 percent in 2022, while infrastructure investments returned 9.8 percent. Real assets, which include unlisted investments in real estate and infrastructure, comprise about 19.6 percent of AP1’s total portfolio. Its investments in private equity funds amounting to SEK 33.1 billion, on the other hand, returned 2.1 percent in 2022. All in all, the return contribution from alternative investments reached SEK 7.4 billion, which in addition to the contribution of SEK 19.2 billion from foreign exchange and SEK 3.3 billion from the absolute return mandate, helped offset some of the losses stemming from equity and fixed-income investments.

“Diversification allows improved, risk-adjusted returns and successful diversification requires deep understanding of the forces underlying and driving investments,” writes the team at AP1 in its annual report for 2022. “An improved, risk-adjusted return is achieved through diversification within and between assets, risk premiums, risk factors, strategies and investment horizons.”


Andra AP-fonden (AP2) reported a negative return of 6.7 percent after costs for 2022. While equities and fixed-income assets suffered due to war in Europe, rising inflation and interest rates, AP2’s non-listed assets achieved a positive return. Alternative investments, including unlisted real estate (including timberland and farmland real estate), private equity funds, sustainable infrastructure, Chinese A-shares, alternative risk premiums, and private debt, generated a positive return of 11.8 percent (5.1 percent reflecting currency hedging). The contribution to the fund’s return for 2022 reached 3.5 percent.

“We’ve placed great value on spreading the risks as far as possible between different types of asset classes and markets, between listed and non-listed assets and between different management models.”

“2022 was a very turbulent year in several respects. However, AP2’s portfolio showed resilience. Our non-listed assets performed better than our listed assets, which was also in line with our expectations,” says Eva Halvarsson, CEO of Andra AP-fonden. “Over time, we’ve built our portfolio for situations like the one that arose in 2022. We’ve placed great value on spreading the risks as far as possible between different types of asset classes and markets, between listed and non-listed assets and between different management models,” she continues. “Our assessment is that, over time, this creates a good and stable return, in line with our long-term mission.”

AP2 had 36 percent of its SEK 407 billion portfolio allocated to alternative investments at the end of 2022, reflecting an 18.5 percent allocation to real estate, 12 percent to private equity, 2.0 percent to Chinese A-shares, 1.6 percent to alternative risk premiums, 1.8 percent to sustainable infrastructure and 0.4 percent to alternative credits. The fund’s real estate portfolio, excluding timberland and farmland real estate, returned 6.5 percent. The portfolio of timberland and farmland, on the other hand, returned 15.4 percent. The private equity portfolio delivered a return of 3.6 percent for the year. Alternative risk premiums booked a loss of 4.6 percent, while the return on sustainable infrastructure assets reached 17.2 percent.

“Over time, long-term, focused efforts have created the ability to generate and pick alternative investment opportunities across the various alternative asset classes,” writes AP2 in its annual report. “For example, the sustainable infrastructure asset class, which was only established three years ago, performed very well and the investments made have appreciated much more quickly than the Fund initially expected.”


In 2022, AP3 experienced its first year of negative returns since 2011 with a decline of 5.8 percent after accounting for expenses, following an advance of 20.7 percent in 2021. However, AP3’s alternative investments returned 8.9 percent in 2022, mainly due to investments in infrastructure and timberland. These alternative investments, which encompass private equity funds, property, infrastructure assets, forests, and insurance risk, constitute 34.9 percent of AP3’s portfolio of SEK 468 billion. Of the 34.9 percent of the AP3 portfolio that is held in alternative investments, 33.3 percentage points relate to unlisted investments.

“The overall characteristics of the portfolio provided resilience during a challenging year.”

“The overall characteristics of the portfolio provided resilience during a challenging year,” says Staffan Hansén, the CEO of AP3. “The alternative investments in real estate, infrastructure, timberland and private equity funds, which make up 35 percent of the portfolio, generated a total return of 8.9 percent. This offset the negative returns on listed equities and fixed income assets and demonstrates that portfolio diversification is serving its purpose.”

AP3’s real estate portfolio, valued at SEK 87 billion – equivalent to 18.6 percent of the portfolio, returned 10.1 percent in 2022. Infrastructure investments, which amounted to SEK 25 billion, or 5.4 percent of the broader portfolio, delivered a return of 14.4 percent. Timberland investments, representing 3.1 percent of the portfolio, yielded a return of 15.8 percent last year. However, the allocation to private equity funds, amounting to SEK 34.9 billion or 7.4 percent, returned only 0.8 percent in 2022 following a return of 62.8 percent in 2021.


The Fourth Swedish National Pension Fund (AP4) experienced a much more difficult 2022 after recording a negative return of 11.9 percent after costs for the entire year. This was the third toughest year for AP4 since the start of the new pension system in 2001. “AP4 needs a relatively high share of equities in its asset allocation to best fulfil its mission over the long term as a buffer fund in the income pension system,” says Niklas Ekvall, the CEO of AP4. “This means that we also need to be prepared for the possibility of having comparatively large swings in our result from one year to another, and also to have an acceptance for large, negative results in individual years.”

With an investment portfolio valued at approximately SEK 528 billion, AP4 does not have a separate alternative assets portfolio. Instead, AP4 focuses on the underlying drivers behind each asset class and does not differentiate between exposures based on different forms of listing. The AP4 team considers private equity as part of the equity allocation and private debt as part of the fixed-income allocation. However, AP4 recognizes real assets, such as real estate and infrastructure, as a distinct asset class generally associated with long-term and comparatively stable cash flows along with built-in protection against inflation. AP4 had about 18.2 percent of its portfolio allocated to real assets at the end of 2022, primarily consisting of unlisted property companies and infrastructure investments.

In 2022, real assets generated a negative return of 0.6 percent, compared to the 24.1 percent return recorded in 2021. Over a five-year period, the portfolio averaged an annual return of 14 percent. Looking at other unlisted investments beyond the portfolio of real assets, unlisted credits generated a return of 6 percent in 2022 and over a five-year period, the average annual return was 5.8 percent. Unlisted equities, however, experienced a negative return of 0.6 percent in 2022, contrasting with the 45 percent return achieved in 2021. Over the course of five years, the average annual return for unlisted equities was 20.6 percent.


The AP Funds implemented new investment guidelines in 2019, lifting the cap that previously limited the amount the state pension funds could invest in unlisted assets. The five percent cap limited their ability to invest in unlisted assets and thereby the ability to diversify their portfolio properties and improve risk-adjusted returns. The lifting of this cap allowed the state pension funds to better navigate the challenging market conditions of 2022.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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