Investment process

AP2’s investment process is based on the needs of the pension system and is designed to support the highest possible pensions over time. This is achieved by generating strong long-term returns without taking more risk than necessary. The process is based on forward-looking analysis, broad diversification and continuous adaptation to changes in the external environment. Sustainability is integrated throughout all aspects of the process.

Governance of the investment process

The AP Funds operate under the AP Funds Act which mandates the Funds to contribute to strong returns over time for a stable pension system and the highest possible pensions. . Accordingly, the investment process is designed based on both the long-term needs of the pension system and the regulatory framework governing how capital may be allocated.

Key investment rules

The AP Funds are independent and determine their own investment strategies.
Investments must not be governed by industrial or regional policy considerations.
At least 20 per cent of assets must be invested in fixed-income instruments.
Currency exposure may not exceed 40 per cent.
AP2 may hold no more than 10 per cent of the voting rights in a public company.
A maximum of 50 per cent may be invested in illiquid assets until 2036, and 40 per cent thereafter.
The Fund’s assets shall be managed in an exemplary manner through responsible investment and responsible ownership, without compromising the overall objective of achieving high returns and balanced risk.

A portfolio constructed to meet the needs of the pension system

Based on the AP Funds’ Act definition of what best serves the pension system, AP2 has formulated a more precise mission statement for its long-term investment strategy: The objective of the Fund’s operations is to minimise the effects of the automatic balancing mechanism over a 30-year horizon by managing capital in an exemplary manner.

To determine how capital should best be managed, AP2 analyses the expected long-term development of the pension system. This is carried out using a proprietary Asset and Liability Management model (ALM), which runs scenarios of the future development of the pension system. The analysis combines factors such as demographic development, financial markets and other macro economic indicators. It is used to identify the portfolio that is considered to provide the greatest benefit to the pension system and contribute to maximising pensions over time.

The investment process in four steps

AP2’s investment process comprises of four steps which together create a long-term and balanced portfolio. Each step has a distinct role and contributes to returns, diversification and adaptability to changes in the external environment.

Strategic allocation

Strategic allocation forms the foundation of the investment process and is determined by the Fund’s Board. It defines how the Fund’s assets are to be distributed across principal asset classes and the level of currency exposure over the long term. It is based on AP2’s ALM analysis and the objective of contributing to the highest possible pensions over time.

Operational portfolio

The long-term strategic direction is translated into an Operational Portfolio. At this stage, decisions are made regarding the underlying strategies for asset management across different asset classes.
This includes specifying how the principal asset classes are comprised, for example the allocation between real estate, infrastructure, agriculture and forestry within real assets. It also involves defining the principles governing the selection of individual securities within each asset class.

Dynamic allocation

As market conditions evolve, adjustments are required in the medium term. Through dynamic allocation, the Fund can temporarily deviate from the long-term portfolio when this is assessed to improve risk-adjusted returns. The most important adjustment relates to whether the public equity asset allocation should be above or below its normal level. It may also involve changes in regional allocation and exposure to foreign currencies.

Active management

Within active management, decisions are made regarding individual securities. This may involve selecting companies, securities or other investments in ways that deviate from the core portfolio in order to increase returns, based on both company analysis and quantitative strategies.

Sustainability throughout the process

Sustainability is an integral part of AP2’s investment process. This means that sustainability considerations are integrated in analysis, portfolio construction, investment decisions and corporate governance. In this way, AP2 works to generate strong long-term returns while contributing to sustainable development in line with its mandate.

Cost-efficient management

AP2 strives to achieve strong returns at low cost. Cost efficiency is therefore a key component of the Fund’s operations. Costs are monitored continuously and benchmarked internationally which has shown that the Fund continuously outperforms its peers on maintaining low costs.

This applies to internal costs, external management fees and other costs arising in asset management, such as transaction costs. Cost management is an ongoing effort and is integrated into processes such as budgeting, where each budget owner is responsible for contributing to a cost-efficient operation.

Three types of costs

Commission costs

External costs for investment services, including custodian fees, fixed fees to external managers and fixed fees for listed funds. These are reported in the income statement as a deduction from operating income.

Operating expenses

Personnel costs and other administrative expenses, which are reported separately in the income statement.

Costs affecting net results

Certain costs affect results directly within individual asset classes, such as performance-based fees, management fees for unlisted assets and fund units, and brokerage fees. These are therefore not reported as separate cost items in the income statement.