AP1 funds six EM briefs

In its 2006 first half report, the fund announced a significant restructuring of its portfolio as it moved a large chunk of its emerging market equities portfolio from passive to active, with Aberdeen (SEK1.36bn), Alliance Bernstein (SEK1.56bn), Emerging Markets Management (SEK1.55bn), Panagora (SEK466m) and Marvin Palmer (SEK282m).

It also awarded Merrill Lynch a SEK3.45bn passive mandate.

During 2005, AP1's emerging market equities portfolio, which was passively managed, returned a massive 62.5%, but that had dropped sharply by 30 June, 2006 to -4.5%, making it the fund's worst performing asset class.

An AP1 spokeswoman explained the performance decline was a result of the strength of the Swedish krona, rather than a weakness in the emerging markets.

"In local terms, emerging markets have gone up 6-7% or thereabaouts, but in SEK it is a negative return because the krona has been stronger against those currencies," she said. "So it's mainly a currency effect, not the return in the emerging markets, although it is has gone down since last year's impressive returns."

Despite the performance slump, AP1 remained confident an active emerging market equities approach would better serve the fund going forward. "We are moving to active management as we think it's a market where you could create added value after costs if you are a good manager," the spokeswoman explained. "We plan to keep the same exposure, but just changed the management style."

In the first half of the year the fund completed the procurement of three private equity mandates. Three asset managers, LGT Capital Partner (European mandate), WP Global Partners (North American mandate) and Pacific Corporate Group (global mandate) have been approved for discretionary private equity management.

Overall, AP1 achieved an increase of SEK1bn for the first half, including inflows from the pension system, while net investment income was SEK200m for the period, corresponding to a return of 0.2% before expenses.

The fund’s internal management of fixed income investments and Swedish equities and the portfolios managed externally on behalf of the fund exceeded their indices, while the combined contribution from active asset management was 0.1 percentage points.

Its exposure to the fixed income market (31% of total exposure) was below that for the strategic benchmark, while exposure to the equities (59%) and foreign exchange markets (21%) was somewhat higher.

Of all asset classes in the fund’s portfolio, Swedish equities generated the highest returns and emerging market equities the lowest (expressed in SEK). All in all, the return on the fund’s equity investments in the first half was 1.8%, before commission costs and operating expenses, equal to a portfolio result of SEK2.1bn.

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