Sweden’s AP1 cuts internally managed equities portfolio to boost engagement

Första AP-fonden (AP1), the SEK221.3bn (€26.1bn) Swedish buffer fund, has cut the number of listed companies in its internally managed equity portfolio to help it engage with companies on both financial and environmental, social and governance (ESG) issues.

According to Ossian Ekdahl, head of ESG at AP1, the internally managed portfolio now contains 282 firms, compared with as much as 500 more than a year ago.

Swedish firms were among the most affected, with the number in the portfolio declining to 34 from 60 previously.

At the same time, the buffer fund maintained its overall equity exposure at half of its assets by increasing its stakes in the firms still in the portfolio.

“The concentration on fewer companies in the equity portfolio will enable us to better engage with them on both financial and ESG issues,” said Ekdahl, citing UN conventions such as the Principles for Responsible Investment and the International Labor Organisation as the basis for its engagement.

While engagement is its preferred method, Ekdahl also said the fund excludes companies like cluster bomb makers.In deciding on the exclusions, AP1 relies on a database supplied by ESG advisor GES Investment Services.

AP1, along with fellow other buffer funds AP2, AP3 and AP4, coordinates its engagement activities with an Ethical Council, which last year engaged with 126 listed firms worldwide.

AP1’s move reflects a trend towards more concentrated portfolios at major institutional investors.

For instance, Dutch giant PGGM has a €3bn responsible equity portfolio, which comprises 15-20 firms that meet its basic sustainability criteria.

And fellow Dutch fund, ABP, via its APG asset manager, is putting together a €2bn ESG-oriented portfolio of around 30 stocks called the European Focus Fund Strategy.

Concentrated portfolios were a key recommendation put forward by leading economist John Kay in his UK government-backed review of UK equity markets and long-term decision making earlier this year.

AP1 reported a 4.5% return on assets in the first half. Over a rolling 10-year period, AP1 has returned 5.7% after expenses, against a target of 5.5%.