A New Compass: AP2’s Strategic Shift Towards Dynamic Asset Allocation
Andra AP-fonden (AP2) has implemented a new asset management strategy in 2024, emphasizing a more dynamic and efficient approach to portfolio management. This involves positioning the fund more actively in response to market trends and changes, with a time horizon of five to ten years (page 5, ‘Significant events’). The new management model, launched on March 26, 2024, includes a broad mandate from the Board, incorporating a medium-term horizon and dynamic asset allocation (page 6, ‘Big changes to boost returns’). This strategic shift aims to generate a better return by allowing for continuous adjustments to asset class allocations, such as increasing equity holdings when markets are undervalued (page 8, ‘New strategy for the benefit of pensioners’).
Sustainability as a Core Driver: Beyond Risk Mitigation to Value Creation
AP2 views sustainability not merely as a risk to be managed, but as a fundamental driver of value creation. The fund integrates sustainability across all asset classes, believing it reduces risk and enhances returns (page 9, ‘Focus on Sustainability for Better Results’). This commitment is evident in their targeted sustainability investments, which had a total market value of SEK 60 billion at the end of 2024 (page 29, ‘Sustainability throughout the investment process’). AP2’s approach includes investing in solutions, active ownership to support change, and divesting from sectors or countries with high sustainability risks (page 29, ‘Three paths to sustainable investment’). A notable example is the decision to no longer include listed assets in China in their portfolios due to high human rights violation risks (page 5, ‘Significant events’). The fund also participated in the World Bank’s new USD 225 million green outcome bond, investing just over SEK 100 million (page 5, ‘Significant events’).
Evolving Investment Framework: From Long-Term Strategy to Operational Agility
AP2’s investment strategy is now structured across three time perspectives: long-term (up to 30 years) based on Asset and Liability Management (ALM) analysis, medium-term (up to 10 years) utilizing dynamic asset allocation, and short-term (up to three years) focusing on security selection (page 8, ‘Strategy based on different time horizons’). The Board sets the long-term strategic allocation, aiming for two-thirds equity-related assets and one-third fixed income-related assets (page 8, ‘New strategy for the benefit of pensioners’). The fund expects a total nominal return of 7 percent, which is 1 percent more than the expected return from strategic allocation alone, achieved through asset strategies, dynamic asset allocation, and security selection (page 9, ‘Active Management for Value Creation’).
Internal Expertise and Quantitative Models: A Cost-Effective Edge
AP2 emphasizes internal management, particularly in fixed income, where most asset classes are managed internally, including global corporate bonds and emerging market bonds. This is a departure from many similar funds that rely on external managers for such complex or labor-intensive areas, leading to high costs (page 19, ‘Quantitative management’). The fund utilizes proprietary quantitative mathematical models to systematically predict future returns, enabling cost-effective implementation of their return strategy given their risk appetite (page 19, ‘Quantitative management’). This internal capability contributes to a lower management expense ratio, which was 0.08 percent including commission expenses in 2024, and 0.07 percent excluding them (page 65, ‘Costs’).
Focus on Unlisted Assets: Real Assets and Private Equity as Diversifiers
AP2 allocates approximately 18 percent of its assets to real assets, with 16 percent in traditional real estate and timberland/farmland (Natural Climate Solutions – NCS), and a growing portfolio in sustainable infrastructure, aiming to reach 5 percent (page 20, ‘Stabilisation in the real estate market’). The fund’s unlisted real estate holdings include significant stakes in Vasakronan Holding AB (25%), US Office Holdings (41%), and Cityhold Office Partnership (25%) (page 56, ‘Development of the Fund’s Real Assets’). A quarter of the equities team’s assets are invested in unlisted equities via private equity funds, spread geographically and strategically, with North America being dominant and buyout and venture being the most weighted strategies (page 17, ‘Unlisted equities’). These unlisted investments are seen as diversifying assets with stable value and lower volatility (page 52, ‘Real assets’).
Proactive Engagement and Collaboration: Influencing Corporate Behavior
AP2 actively engages with portfolio companies and collaborates with other investors to drive positive change, particularly in sustainability. This includes dialogues, voting at general meetings, and participation in nomination committees (page 30, ‘Stewardship for Positive Change’). The fund’s engagement is often pursued in collaboration with other investors, such as through the Council on Ethics of the Swedish AP-Funds, which coordinates dialogues with foreign companies and runs proactive projects on material sustainability topics (page 30, ‘Collaboration’). AP2 also developed a new model for analyzing deforestation risk in listed portfolios, which is openly available for other investors to use (page 5, ‘Significant events’).
Geopolitical and Macroeconomic Trends Informing Investment Decisions
AP2 considers key trends such as climate, AI, demographics, and geopolitics as fundamental to future investments. The fund acknowledges the shift from globalization to increased conflict zones and distrust between countries, which influences their investment decisions and emphasizes the need for risk diversification across asset classes and geographies (page 7, ‘Trends as a basis for future investments’). In 2024, the fund was slightly overweight in equities and adjusted currency exposure and regional allocation within equities based on changed return assumptions, partly in the run-up to and after the US election (page 11, ‘Increased activity in the portfolio’).
New Appointments and Mandates
Erik Kleväng Callert, Chief Investment Officer (CIO), left AP2 on January 8, 2025. Anna Hammer has been recruited as his successor and will take up her post in spring 2025 (page 47, ‘Executive Management’, and page 85, ‘Note 20. Significant events after the end of the financial year’).
AP6 will be incorporated into AP2, following a government review of the AP Funds aimed at streamlining and modernizing their operations (page 7, ‘Government review of the AP Funds’, and page 85, ‘Note 20. Significant events after the end of the financial year’). AP2 looks forward to implementing this integration (page 7, ‘Government review of the AP Funds’).
The fund was one of the investors when the World Bank issued its new USD 225 million green outcome bond, with AP2’s investment totaling just over SEK 100 million (page 5, ‘Significant events’).
AP2 has decided to no longer include listed assets in China in their portfolios, mainly due to the high risk of human rights violations (page 5, ‘Significant events’).
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