The Swedish pension fund’s new CIO is bringing in a tactical approach to weather market storms. Pirkko Juntunen speaks to Jonas Thulin


Third Swedish national pension fund
Real estate assets: US$8.04bn
Ranked: 67th

  • Real estate allocation returns negative 7.1% in 2023
  • New CIO seeks to implement tactical approach across asset classes
  • Second half outlook looking more promising

AP3 is one of five buffer funds mandated by the Swedish Parliament to strengthen the state income pension system and contribute to sustainable development through responsible investments. Jonas Thulin took the reigns as CIO at the beginning of the year.

As AP3 is an active investor with a bottom-up approach. Thulin intends, among other things, to complement this by introducing a holistic and structured top-down tactical approach to the AP3 investment processes.

Thulin’s appointment also coincided with a correction in the real estate market. “I think we will have to live with swings in real estate, such as valuation, transaction activity, profit and loss in the first half” of the year, he says.

“But the second half looks more positive with interest rate cuts and an improved and more stable economic outlook. We expect a positive turnaround during the year, which we base on our models that forecast the real estate market. But, as always, when we change direction in market trends, volatility will increase.”

Jonas Thulin

Jonas Thulin: “everyone has a plan until they get punched in the face”

Thulin says AP3’s way of handling volatility is to calculate risks and work tactically. He quotes famous boxer Mike Tyson: “Everyone has a plan until they get punched in the face”.

He explains: “Everyone can handle a win but not everyone can handle a loss. You have a strategic plan and then suddenly there is a war or a pandemic – ie, a punch. Then we, as investors, have to know what to do in that particular environment.

“Let’s say that there is a risk that, potentially, the Swedish real estate market will have a challenging time now, at the beginning of the year, while the stock market is doing well – what do we do? We start by quantifying and gathering data that convinces us when the real estate market might bounce back. In the meantime, our data shows that the stock market will do very well.

“The answer might then become rather stark – in those circumstances, we need to increase our equity allocation in order to mitigate what is going on in real estate. We do not see any reason to start selling our real estate holdings or evaluate if something has changed fundamentally, as we do not see evidence of this.” 

AP3’s real estate portfolio, which returned a negative 7.1% for the full year 2023, comprises 16.3% of total assets and is the largest allocation in the fund’s alternatives portfolio, which constitutes 30.4% of total assets. The alternatives allocation fluctuated between 28.8% and 36% during the year. 

AP3 invests directly in real estate via Vasakronan, Hemsö, Trophi, Regio and Trenum and the listed real estate company Sagax, as well as smaller investments through real estate funds. Vasakronan is jointly owned by state pension funds AP1, AP2, AP3 and AP4 and mainly invests in office and retail space in larger Swedish city centres.

As a result of the investment limits that govern the AP funds, an increase in alternatives as a whole is limited for AP3, but shifts in allocation between the different components within alternatives are possible. “We evaluate the portfolio continuously to see that we have the right mix within the alternatives portfolio, just as we do in equities, fixed income and foreign exchange,” Thulin says.

AP3 uses the same approach across its portfolios. “One of the strategic challenges as an investor is the negative risk of doing too little under the guise of being a long-term investor,” Thulin says. “Statistically, there are numerous analyses that highlight that from a long-term perspective, it is worse to miss ‘up days’ compared to suffering the ‘down days’. We can handle downturns in the stock market, but if you miss the recovery you, historically, will face a longer recovery time until you catch up and close the drawdown with your benchmark.

“This has been very clear during the last four years. The pandemic really stress-tested this as the recovery was a strong V-shaped development in both macro and markets, at a time when the consensus forecasted Ws, Ls, Ks, Us (shapes of recover plotted on a graph)– a number of scenarios that did not bear fruit. This stressed a lot of portfolios that did not catch the trough; the time of recovery then affects those portfolios for years, just as after the global financial crisis did.” 

In addition to bringing in a more tactical approach to safeguard the long-term commitment and active bottom-up investments by the entire team, Thulin also brought in a more data-driven process. “If you have a data-driven process you can backtrack each step much easier and check where you went wrong and what you got right,” emphasising that the new, more data-driven asset management approach will serve the fund well irrespective of market movements. Thulin explained that the more tactical approach is meant to complement not substitute AP3’s strong legacy and bottom-up investment methodology.

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