As part of Sweden’s national pensions buffer system, Fjärde AP-fonden (AP4) is celebrating its 50th anniversary with an average annual return of 13% since inception, and an initial capital contribution which has risen 1,000-fold from SEK500m (€43.4m) in 1974 to SEK533bn by 30 June 2024.

AP4’s ALM process sets long-term return targets by assessing the pension system’s long-term need for returns and net payments from the AP funds, structural preconditions for economic development, and anticipated long-term returns. This year’s review showed that the national pension system has developed a strong balance sheet and a shorter expected period of remaining outflows. For the pension system, it is therefore better for AP4 to slightly lower the expected return than to increase the risk in its portfolio. AP4 will therefore keep its long-term real return target over 40 years at 3.5%, with an unchanged long-term range for equities at 50% to 70%.

Taking advantage of legislative changes, AP4 has raised its allocation to illiquid real assets from 12% to 16% of fund capital over the past five years. In 2019 this was mainly in real estate, but the recent increase comes largely from infrastructure. The change is aimed at diversifying the portfolio to increase exposure to long-term stable real cashflows.

For thematic sustainable investing, AP4 has adopted a focused approach, rather than chasing a wide variety of investments. Megatrends were identified representing events in areas such as consumer behaviour and technology, as well as key trends like greenhouse gas mitigation and biodiversity loss. The most relevant were grouped into five investment themes, representing around 90% of global emissions, including decarbonising industry, decarbonising transport and green buildings and infrastructure. This analysis pinpoints potential investment areas by identifying winners and losers in the sustainability transition.