Monday, March 3 2008 was a happy day for AP1’s former managing director, William af Sandeberg. Not just because he was looking forward to the start of spring but because, eight months after he first publicly announced his retirement from the SKr218.79bn (€23.32bn) fund, Mr af Sandeberg was finally able to step down.

And it was the long-awaited arrival of Johan Magnusson, SEB Investment Management’s former head, which made that possible. His much heralded appointment came by way of five years at the Swedish investment house and 25 years in the asset management business. “I was headhunted for the managing director’s role at AP1,” he told nrpn, “a position I am very honoured to have accepted and have been chosen for”.

And well he might be – his timing was good. Indeed, Mr Magnusson joined the only buffer fund to have beaten its active management benchmark in 2007 after it delivered total returns of 4.6 per cent after expenses. “We are very pleased to have once again outperformed our strategic benchmark,” said Mr Sandeberg at the beginning of the year. “That was mainly thanks to our in-house fixed income and equity management.”

So is Mr Magnusson feeling the pressure of that success? Slightly, he says: “Coming into any job where you are managing other people’s money is demanding, but you either like that sort of pressure or you don’t – I thrive off it,” he says. “The fact that I am joining at a time when the fund is yielding above benchmark returns does not make it any harder – it’s a good thing – but it has to be remembered that we will encounter periods when that won’t be the case. It is my job to make sure we don’t face too many of those periods.”

To ensure that, Mr Magnusson is already looking to make changes to the fund’s strategic benchmark, which currently includes a 59 per cent stake in developed and emerging market equities and a 38 per cent holding in Swedish and foreign bonds. The rest is made up mostly of unlisted assets.

“I do not want to rush into making any changes – and have not communicated anything internally or externally – but we do need to make sure we have got the right long-term asset mix,” he says.

“We have carried out a new ALM study and it has convinced me that we need a high exposure to equities. It is a requirement that we hold at least 30 per cent of our portfolio in secure bonds but we are allowed to invest the rest in equities and we need to make sure we use that 70 per cent effectively.”

Any changes, however, will not come without scrutiny. In November last year, for example, AP1’s sister fund, AP4, was harshly criticised by the Swedish parliament’s finance committee over its performance. The committee pointed to the fact that AP4 had not reached its target for active management since mid 2001 and suggested it was unlikely to do so for another five years.

Closer to home, former AP1 director Harry Flam, now a professor of economics at Stockholm University, slated the buffer funds in a June 2007 discussion paper. He said the five buffer funds should be merged into one and switch to an investment style based on pure passive management. “Merging the AP funds will save SKr1bn a year,” he said in the paper. “And moving to passive management would save a further SKr1bn.

It is now clear that in 2001 when the number of buffer funds was decided upon, he added, “it was done so under false pretences and that the funds have opted for a costly management model that hasn’t yielded any significant returns – the system needs to be reformed”.

Mr Magnusson accepts this criticism but makes it patently clear that his fund will not stop investing a portion of its assets actively. “I believe in active management and have no interest in stopping our use of it.

“We and the other buffer funds have come in for some criticism but that is part and parcel of being an AP fund – we will always be in the spotlight. But that doesn’t mean these discussions shouldn’t be taking place – they should, it’s just that we believe we have the potential to deliver active management. We have outperformed our benchmark consistently over the past five years and hope to continue that.”

Since its inception in 2001, AP1’s net assets have grown by SKr65bn, which corresponds to an average annualised return of 5.2 per cent before and 5 per cent after operating expenses. Five-year (2003-2007) annualised returns on net assets after expenses were 11.7 per cent.

“All in all, active investment decisions over the five-year period between 2003 and 2007 have increased the fund’s investment earnings by around SKr4bn, SKr900m in 2007,” the fund said in its end of year report. “This is equal to an active return of 0.4 percentage points for 2007 and an average annualised active return over the past five years of 0.5 percentage points.”

The future looks bright for Mr Magnusson. His job will be to make sure it stays bright. “Already, I know I love this job and although I have joined the fund at a time of great market instability I feel there are lots of opportunities out there for us to explore. I am taking the task ahead of me very seriously.”

FUND FACTS

Location: Stockholm
Assets: SKr218.79bn (€23.32bn)
Total returns: 2007: 4.6%

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