AP2 returns SEK 12.8bn in 2020; aligns portfolio to Paris Agreement

Andra AP-fonden (AP2), Sweden’s second national buffer fund, reported full-year earnings of SEK 12.8bn in 2020, a year it also spent aligning its portfolio to the Paris Agreement.

The fund said its positive return is a result of developments in the stock market, particularly the Swedish, and also reflects a good return on the fund's investments in private equity funds, Chinese equities and real estate. The Fund's Swedish and Chinese equity portfolios generated a total return of 15.9 per cent and 33.2 per cent respectively.

"The upward trajectory of the global stock market has largely been fuelled by growth equities in the technology sector. This has adversely affected the fund's equity portfolios, which avoid concentrating excessive holdings in large companies and instead overweight equities with low valuations. We expect this to generate a better return in relation to risk in the long run. However, it has been negative for us this year," AP2 CEO, Eva Halvarsson, explained.

The average returns AP2 in the last five and 1 years have been 7.3 and 7.7 per cent respectively. Growth during the year means that the fund's return once again exceeds the its long-term return assumption.

Halvarsson, described 2020 as a “special year” in many ways, which was strongly marked by the Covid-19 pandemic.

“Yet in spite of everything that has been happening around the world, we have managed to deliver much of what we had decided to do. We have taken key steps to further develop our asset management approach, which we hope and believe will contribute positively to returns and to a more sustainable society.”

In addition, Halvarsson said she is “proud” of the fund for adapting its internally managed holdings of global equities and corporate bonds during the autumn to bring them in line with the EU Paris-Aligned Benchmark, without compromising the return and risk characteristics of the portfolios.

“This alignment of the portfolio is, to our knowledge, unique in that it includes holdings of both corporate bonds and equities," she said. The fund's approach to sustainability is based on the conviction that sustainability leads to better management results, and is thus advantageous for the income pension system and for pensioners.

AP2 has been a pioneer on several occasions, for instance, with its investments in green and social bonds, sustainability requirements in agreements entered into with private equity funds, fossil energy company divestments, reporting in accordance with TCFD and UNGPRF and now, most recently, aligning the portfolio with the Paris Agreement.

"There is so much going on in the area of sustainability. We have been working for many years to integrate sustainability into all of our management activities, and it is pleasing to see there is an ever-increasing knowledge among investors and companies and that discussions around the issues are becoming more nuanced," Halvarsson added.

Its work on sustainability in 2020 saw it internally develop multi-factor indices for global equities and corporate bonds that meet EU Paris-Aligned Benchmark (PAB) criteria. Among other things, this means a reduction in the carbon footprint of the portfolios of global equities and corporate bonds by about 70 per cent when compared to market-weighted indices. It has also developed a human rights strategy.

For the third consecutive year, AP2 published a report in compliance with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations. The United Nations-backed Principles for Responsible Investment (PRI) also included AP2 in its Leaders’ Group 2020. This group showcases signatories at the cutting edge of responsible investment. The theme for the year was climate reporting.

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