SWEDEN - Failure to hedge its US dollar denominated assets cost the Second Swedish National Pension Fund/AP2 SEK1.7bn (e185m) over the first half of 2006.
Of the fund’s SEK190bn assets, 11.7% were exposed to foreign currency. While 89% of the portfolio was hedged, due to strategic allocation and the set level of hedging, the fund failed to hedge the rest of the currency exposure.
A weaker US dollar was cited as the reason for the net loss on foreign exchange transactions and the amount lost was therefore the result of AP2’s holdings in US assets.
This is a technical figure, really, because the fund does not invest in currency as an asset class in itself, said an AP2 spokesperson when asked for comment.
Blackrock,Singer & Friedlander/Denver LL and Wellington manage the fund's US government and credit bond mandates.
The fund's long term investments in Swedish equities also underperformed their benchmark index by 6.6%.
AP2 choses specialised indexes in a range of different areas, as opposed to traditional broad-based ones but in the case of Swedish equities, this decision was not beneficial.
The benchmark used consisted of one such custom made index which performed extremely well over the first half of 2006. In spite of this, the portfolio outperformed the broad based SBX index and generated a 4.4% overall return.
Despite these losses, AP2 posted an increase in capital assets of SEK4.3bn, or return of 1.9% over the first half year 2006.
“This is a good result, in light of the difficult market conditions experienced during the first half,” said Eva Halvarsson (pictured), CEO, AP2.
“This favourable outcome may primarily be attributed to our selection of a benchmark portfolio featuring low currency exposure and the fund’s own choice of indexes,” she claimed.
The fund also reduced the number of mandates under external management, resulting in 75% of its total assets being under in-house management.
Two of AP2’s domestic mandates were terminated to this effect over the first half of the year.
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