Ideally, AP3 would like to increase its allocation to alternatives even further; however investment restrictions placed on the fund by the Swedish government prevent that from happening. Under the restrictions, the fund’s allocation to unlisted securities is capped at 5 per cent. At least 30 per cent of the fund’s assets are to be invested in interest-bearing securities with “low risk”, and a maximum of 40 per cent of assets may be exposed to currency risk. At least 10 per cent of the fund is to be managed by external asset managers, and commodities exposure is not allowed.

Valtonen says the 5 per cent cap on unlisted assets – which means private equity for AP3 at the moment – restricts what the fund can do in infrastructure, and is a “suboptimal” constraint. He hopes that the government may consider removing the limitation to allow the fund to invest more freely across alternatives. The new normal portfolio redefines asset classes and includes a 5 per cent allocation to “new strategies”, which at this stage consists of farmland in the Ukraine and

Russia; secured bank loans in the US and

UK; reinsurance risk (initially through catastrophe bonds); and equity with an absolute return focus – for example micro caps, an actively managed life science portfolio and possibly frontier markets.

One of the key themes in choosing the new long term asset allocation has been diversification. Valtonen stresses that the new portfolio is still in the early construction phase and is not a reaction to what’s happened in the global markets but rather a long term goal to improve diversification and raise the allocation to alternative assets. “The main purpose is to create a portfolio structure that’s flexible,” he says. “The ‘new strategies’ is a container for different kinds of risk premiums; stand alone risk premiums would be too small to warrant individual allocations but the combined risk premiums make sense. We wanted to get rid of the siloed approach.”

All private equity investments are made through funds and fund of funds as required under the government’s mandate and both infrastructure and timberland investments are made through external funds. AP3 holds a 25 per cent stake in Vasakronan, the biggest real estate owner in

Sweden, and also invests in several real estate funds around the globe. Over recent years, the fund has been reducing the amount of traditional active stock picking within the portfolio and last year AP3 implemented an alpha/beta separation strategy for both internal and external management.