Swedish Pension Fund AP2 Returns 2.9% in H1

Total asset value rises to $38.85 billion at the end of June.

Swedish pension fund Andra AP-fonden (AP2) reported a total return of 2.9% for the first half of 2018, raising its total assets to SEK352.4 billion ($38.85 billion) as of the end of June, but missing its benchmark’s return by 0.1%, excluding alternative investments and costs.

Although the fund missed its benchmark for the first half of the year, AP2’s return exceeded its long-term return assumption of 4.5% annually. AP2 said that over the past 10 years, the fund’s average annual real return has been 6.4%, while its annualized returns were 7.3% during the same period. Since its inception in 2001, the fund has generated an overall return of SEK244.5 billion, which is equal to an average annual return of 5.9%, including costs.

Developed markets equities was the portfolio’s top-performing asset class during the first half, with an 8.2% absolute return, followed by foreign government bonds, and global green bonds, which returned 7.4% and 7%, respectively, while Swedish equities returned 6.6%. Emerging markets equities were the worst-performing asset class, returning just 0.6% for the first six months of the year.

The fund has 21.5% of its portfolio in developed markets equities, 11% in Swedish fixed income, 10.5% in foreign credits, 10.2% in emerging markets equities, 9.4% in Swedish equities, 6.2% in emerging markets fixed income, 4% in foreign government bonds, and 1% in global green bonds.

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AP2 said that during the first quarter, it implemented extensive changes to its management of foreign equities by introducing new benchmarks for both emerging markets and developed markets. The new indices compile the majority of the alternative indices, which the fund previously sought exposure to in individual sub-portfolios, turning them into one multiple-factor index for developed countries and one for emerging countries.

“Through the new indices the fund also gets exposure to a number of sustainability factors that, beyond improving the portfolio’s sustainability characteristics, also improve the expected return and risk,” Eva Halvarsson, CEO of AP2, said in a release. “Among other things, the new indices entail a considerably lower carbon footprint.”

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How Many Fed Interest Rate Increases Will We Get, Anyway?

The conventional projection is for six more, though some want it to stop at three.

It’s the edge-of-chair question for credit markets: How many more interest rate increases will the Federal Reserve order? Three? Six?

That issue is heightened now because the Fed’s policymaking body will release its latest minutes on Wednesday. Fed watchers hope the minutes from its July 31-Aug. 1 meeting will give some insight into how many more hikes are coming.

Right now, according to bets on the CME and Fed officials, there will be six quarter-point raises for the benchmark federal funds rate: two more for this year, three more in 2019, and one in 2010. That would lift the benchmark to around 3.5%, well above the current range of 1.75% to 2%.

But a significant group of Fed officials and economists think that would be too much, and perhaps bring on a recession. The most prominent critic: President Donald Trump, who has inveighed against new Fed Chairman Jerome Powell’s continued push to raise rates, which the president fears will hobble the economy’s recently robust growth rate. The Fed has already had two increases this year, after a gradual program of boosts beginning in late 2015.

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On Tuesday, Dallas Fed President Robert Kaplan wrote an essay calling for the central bank to hike short-term rates just three or four more times, and then re-assess. At that point, he contended, the Fed likely would reach the “neutral level,” where its actions neither help nor hurt the economy.

Then, Kaplan indicated, he “would be inclined to step back and assess the outlook for the economy and look at a range of other factors—including the levels and shape of the Treasury yield curve—before deciding what further actions, if any, might be appropriate.”

The flattening yield curve, with the two-year Treasury and the 10-year a mere 0.24 percentage point apart, is inciting fears that the curve will invert. Then, short-term bonds would yield more than the 10-year—long a portent of a coming recession.

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