FUND SELECTION: More external managers at AP1

Could we see a trend developing where institutional investors express their asset allocation efforts with passive mandates and where retail fund-of-fund managers utilise ETFs and other liquid instruments to create portfolios? Niklas Tell comments…

2008 provided investors, individuals and institutions alike with an exceptional environment in which to grow, or at least safeguard, their capital. With the benefit of hindsight many have concluded they must change their ways in order to do better. Some large institutional investors have also started to ask how they make the most of the money they spend on asset management, be it internal managers or external mandates.

One of these is Första AP-fonden (AP1), one of five buffer funds in the Swedish pay-as-you-go pension system, which in February reported that the fund is changing its asset management model. The fund has decided it will focus more on the long-term strategic asset allocation, ie, officials will put more effort into deciding if they should own banks or not rather than selecting one bank over another. The fund said this will lead to the redundancy of some 20 employees as they streamline the asset management organisation and they are expecting the measures will reduce operating expenses by some 25% annually.

Johan Magnusson, the managing director at the fund, says: “We want to raise the level of ambition in strategic asset allocation, which has the greatest influence on the fund’s ability to deliver long-term returns, and have therefore decided to make this change.”

Anna Hedborg, chairman at Första AP-fonden, adds: “We must naturally draw our own conclusions from the global financial crisis that has severely impacted our own earnings. A shift in the fund’s strong research capacity, in order to increase the focus on mid- and long-term investment decisions, is therefore necessary and will also reduce our overall operating expenses.”

As the AP1 is one of Sweden’s largest pension funds, with net assets of SEK 219bn (€20bn), it might make sense to keep an eye on what they are doing and also ask what it means. This is interesting as we consider the fund selection operation where the fund has a team of five people. Johan Magnusson says that if anything the fund will put even more emphasis on external managers and the current team responsible for selecting external managers will not be affected by the changes.

“We currently have some 40% of our assets with external managers and that will increase slightly rather than decrease going forward,” he continues. However, he also highlights that even if the scheme still believes in active management, the allocation to passive mandates could increase. That is probably a natural consequence of an increased focus on strategic asset allocation. If you want your strategic views to really influence the bottom line you might not be willing to take on too much manager risk.

Could we even see a trend developing here where institutional investors express their asset allocation efforts with passive mandates and where retail fund-of-fund managers and/or advisers utilise ETFs and other liquid instruments to create portfolios?

What is your take?

If institutional investors focus more on asset allocation and express their views with passive mandates and if retail fund-of-fund managers and advisors increase their use of ETFs to build portfolios – where does that leave traditional active managers?
If there is a trend towards more passive investing (be it ETFs or traditional index funds) – are we witnessing the death of the fund selector?

I look forward to seeing your thoughts on this and please remember to keep us updated on any developments in the fund- and manager-selection space and make sure to visit www.fundselection.org/blog and help us create the most relevant discussion on this increasingly important area of asset management.