Like all other pension funds,

Sweden’s AP3 is a long term investor. However, the extraordinary circumstances of the last 18 months has forced the fund to reconsider its short-term risk appetite, and whether there are better ways to allocate its risk budget in this highly volatile environment. “We, as is every fund in the world, are discussing also our short-term risk preference and the big question is: where are equities going next?” says Erik Valtonen, chief investment officer of AP3, who had a chance to compare experiences with his Australian counterparts last month as a speaker at Terrapinn’s Asset Allocation Summit in


“We are an equity-heavy investor; we paid a price for that last year, we believe that equities are a good longterm value proposal but we have to think about what the next 12 months will bring.” Kerstin Hessius, the fund’s chief executive officer, admits a high level of portfolio diversification was “insufficient to ensure a satisfactory result in 2008”. AP3 reported a full year loss of SEK44.8 billion ($A8 billion) in 2008, corresponding to a return of -19.8 per cent after expenses.

The sharp downturn in global equity markets had a significant impact on the fund’s equity portfolio, which saw its value drop by almost 40 per cent. “We simply have to acknowledge that the overall level of portfolio risk was too high,” Hessius said in a statement. But according to Valtonen, reducing the level of risk in the portfolio does not mean shying away from risky asset classes. “The answer might be that equities are exceptionally cheap right now and we increase the allocation, but we are discussing what to do with all the risky assets,” he says.

In fact, AP3 recently reset its strategic or “normal” portfolio, reducing its weighting to bonds and equities and increasing the weighting to alternative investments to 20 per cent of the total fund. For a fund that’s aiming to reduce risk, such a move might sound counterintuitive, but as Valtonen explains, it’s all about diversification. “We increase other types of risk, yes, but we reduce our dependence on equity risk,” he says. “We will not be allocating more money to private equity, but real assets – for example infrastructure and timberland – are assets that to some extent are independent of what’s happening in the equity markets so that gives a diversification benefit.”

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