Top1000funds.com

Iceland’s LV is eyeing more emerging markets allocation and private equity co-investments after conducting an SAA review, which will be finalised in the first half of 2026. CIO Arne Vagn Olsen says the shift is designed to make the $11 billion pension fund future-ready as he outlines the thinking around active management and manager selection.

Changes are afoot at Iceland’s Lífeyrissjóður verzlunarmanna (LV) as the $11 billion pension fund examines whether to incorporate more emerging markets allocation and private equity co-investments in its portfolio following a fresh strategic asset allocation review.

The review, which was conducted with Mercer and will be finalised in the first half of 2026, aims to understand the LV’s asset-liability relationship and will make the fund future-ready, says chief investment officer Arne Vagn Olsen in an interview last December.

“We are not necessarily in a rush to do this [review]. This is a very strategically important project for us, so we want to give it the time that it deserves, to discuss in-house, to discuss with the board and of course members and Mercer,” Vagn Olsen tells Top1000funds.com.

“We have analysed our risk budget and revised that, and having an updated risk budget means that you might have some more flexibility when you choose how to optimise the portfolio.”

LV is the largest open pension fund in Iceland and the second largest by overall assets under management following the $12 billion Lífeyrissjóður starfsmanna ríkisins (LSR), the pension fund for Icelandic state employees. But in January, LV began exploring a merger with the $5.4 billion Birta, which would make the combined entity the biggest pension fund in the nation.

A big investor in a small nation with a population of 390,000, LV’s assets under management are equivalent to one-third of Iceland’s GDP, which means any changes to the portfolio it makes need to be implemented gradually and steadily to prevent fluctuations in its foreign exchange market.

One shift spurred by the review is a potential change to the global equities benchmark, which is notable as almost all the fund’s international stock investments are passive.

“Traditionally we have had MSCI World as a benchmark, and it basically means that you’re excluding emerging markets as a benchmark composition. Doesn’t mean we haven’t invested into emerging markets, but one of the avenues we’re looking into is whether it would make sense to maybe switch to ACWI as a global equity benchmark,” he says.

The share of active management in LV’s global equities portfolio has steadily fallen – from 60-70 per cent when Vagn Olsen joined eight years ago to almost none today – after repeated manager underperformance.

“We are not against active managers. We simply have had trouble finding an active manager that has consistently outperformed, with the level of risk that we’re willing to take,” Vagn Olsen says.

“Private equity and public equity are the same block for us – it’s all equity in the end.

“The structure we have now is basically that you have the beta through the passive [listed] allocation, and the point is that you try to create the alpha through the alternatives, through private equity.”

LV currently allocates 37.8 per cent to foreign public and private equities and 13.5 per cent to domestic equities, as well as 11.9 per cent to foreign bonds, 11.1 per cent to government bonds, 18.8 per cent to mortgage bonds and real estate-related securities and 6.2 per cent to other bonds.

The fund is also examining the pros and cons of adding emerging markets debt to its foreign bond portfolio, complementing existing bank loans and higher-yielding exposures.

More co-investments

In private equity, Vagn Olsen describes LV as having a core-satellite approach, with the core part being strategies overseen by larger managers where the fund targets a 2-3 per cent annual outperformance over listed markets.

The satellites consist of managers “a bit more spicy”, such as those focused on, for example, tech or managers that have more “allowance” on what type of investments they can do such as turnaround and distressed deals.

LV has an overall private equity allocation target of 7.5 per cent, which Vagn Olsen says could change post the SAA review.

“We are looking into co-investments at the moment with our existing private equity managers. That is a way to both lower cost and potentially increase the gains by lower carry,” Vagn Olsen says.

The fund doesn’t have plans to put money into private debt as Icelandic legislation dictates that pension funds can only invest up to 20 per cent of their portfolio in unlisted securities, and Vagn Olsen would much rather put money to work in higher-returning asset classes like private equity.

This doesn’t mean the fund is averse to private debt and Vagn Olsen says it would consider it if a lifting of the unlisted investment cap comes to pass through the Icelandic Ministry of Finance next year.

“In Iceland, the latest change to the legislation was in 2016 when the concept of prudent person principle was introduced… but at the same time you’re very limited in how you can do that simply because of the quantitative limitations [on asset classes],” he says.

“The good news is that there is undergoing work between the Ministry of Finance, the Central bank of Iceland and the Icelandic Association of Pension funds with regards to reviewing the investment restrictions and there seems to be pretty good consensus on the need to change the legislation, as they are to some extent hindering what we would consider best practice in the management of a member’s assets.”

Bigger, better

Last April, LV swapped out Brown Brothers Harriman for global giant J.P. Morgan as its custodian. It was the prerequisite to another investment process overhaul which saw the fund move $2.5 billion in the foreign equity portfolio from pooled funds to separately managed accounts.

The move was enabled by LV’s rapidly expanding size, which doubled in the past seven years, Vagn Olsen says. The underlying assets remain the same across both structures.

“A few things that happen when you move from a pooled fund to a segregated mandate. In our case there are a lot of taxation treaties that we can now utilise on these assets which will automatically lead to financial gains” he says.

“We were able to negotiate lower fees and were able to express our responsible investment policies in greater detail, such as with an execution list.”

The transition was completed in November and won’t need ongoing resources, equipping LV with a clearer view of transactions, Vagn Olsen says. While he declines to put a specific number around the potential performance uplift, he says the fund “wouldn’t have done this if we didn’t see a clear financial gain of doing this for the long term”.

“So far so good, and we’re very much looking forward to reaping the benefits next year,” he says.

ATP, the Danish statutory pension fund, is braced for the imminent publication of an external evaluation, begun a year ago, of both its investment strategy and how it communicates its complex results. ATP oversees a DKK 694 billion ($110 billion) allocation split roughly 80:20 between hedging assets comprising bonds and interest rate swaps, and a return-seeking portfolio.

A key part of the review will focus on how ATP could better communicate its results. The investor’s main value – the interest it earns on its guaranteed pension provision – is not always reflected in financial reporting because communication tends to hone in on the result of its investment portfolio instead.

Yet this constitutes a much smaller part of the total assets, and only contributes to a portion of the overall value creation. The review will include proposals on how the overall value creation of the ATP product can be illustrated and communicated in future reporting, possibly with the help of new key data.

“The evaluation group will provide proposals on how ATP can make it easier in the future to demonstrate how it creates value over time, not only through annual investment results, but throughout the entire pension lifecycle,” Allan Japhetson, head of investment strategy at ATP tells Top1000funds.com.

Yet Japhetson also flags that the need for reporting transparency must not impact returns, or ATP’s competitive advantage for the 5.5 million Danes who save with the institution.

“Such proposals for the demonstration of value creation should balance transparency but not be so transparent that it hurts the future returns for the members of ATP.”

Additionally the review (modelled on the type of external analysis also favoured by Norway’s oil fund) will assess the decisions and implementation of changes mandated by the Danish Parliament back in 2021, seeking affirmation that ATP’s investment strategy is effective and robust for the long term.

The purpose of the evaluation group is to take a fresh look at whether ATP’s approach is still the right one – and whether there are areas where the investment strategy can be further improved.

The evaluation group, chaired by Jesper Berg, former CEO of the Danish Financial Supervisory Authority and stalwart of the country’s investment industry, together with two to three foreign experts, has had the freedom to examine all parts of the investment strategy within the framework of the law and will report before June 2026.

COMPLEX DRIVERS BEHIND THE INVESTMENT PORTFOLIO

ATP has just reported 2025 returns and in a nod to the reasons behind the review, most analysis has gone into unpicking the 19.5 per cent return in the investment portfolio.

The return allocation comprises the schemes bonus potential plus leverage by borrowing from the bond based hedging portfolio. Using internal leverage, the investment portfolio takes two to three times more risk than a traditional portfolio – it also has a higher proportion allocated to bonds compared to a traditional portfolio.

In a strategy many investors have moved away from, ATP applies a risk balanced approach to how it weights different asset classes in the investment portfolio which is composed of approximately equal amounts of risk in equities and bonds.

“These factors mean that ATP’s returns cannot be directly compared with those of other pension funds, including investors with a more traditional investment approach based on short horizons,” states the fund.

It continues, “the strategy implies that, all other things being equal, ATP performs relatively well when bond prices rise, but performs relatively poorly when equities perform strongly as ATP holds more bonds and fewer equities than a traditional portfolio.”

The fund maintains its risk‑balanced approach can outperform both pure equity portfolios and traditional 60/40 portfolios – and helps stabilise the bonus capacity in the event of interest rate changes. The investment portfolio has an annual return on average of 10.4 per cent.

In an added complexity for beneficiaries, ATP’s assets shrank during 2025 shedding around DKK 24 billion ($3.8 billion) due to rising interest rates.

The same movement was seen in 2022 when interest rates rose sharply in line with inflation – and ATP’s assets plummeted from DKK 947 billion ($150 billion) at the end of 2021 to DKK 677.8 billion ($107 billion) by the end of 2022.

ATP’s most recent performance was driven by foreign equities which returned 18.7 per cent – 23 per cent of the equity allocation is to US stocks in an approach that Japhetson said won’t change in 2026. Moreover, because ATP generally hedges its currency exposure it protected the portfolio from the impact of the US dollar weakening some 10 per cent against the Danish kroner in 2025.

“Generally, ATP hedges its currency exposure, which had a positive impact on the overall return in 2025,” he said.

ATP is also unusual amongst peers for its large allocation to Danish assets which account for roughly 40 per cent of the investment portfolio and spans Danish equities, mortgage bonds, property and infrastructure, aligning with growing pressure on Danish pension funds to invest more at home.

Denmark’s Association of Listed Companies, FBV, has called for the pension sector to buy Danish equities in order to reverse a trend of declining numbers of listed companies and an absence of new listings. The number of companies on the main exchange has almost halved from 204 in 2007 to 114 last year.

Low expenses

ATP’s latest returns are also a chance to showcase its low costs.

On the administration side, ATP has lower costs than its peers, particularly in support functions and IT support and on the investment side, the higher degree of internal management and integration of AI is helping reduce costs.

“In particular, we have made significant strides in the use of artificial intelligence, where technology increasingly supports our operations by, for example, collecting information, compiling data and facilitating documentation tasks. AI technology is used with care and within a clear ethical and security framework,” concludes the fund.

Chief investment officer of the $225 billion Teacher Retirement System of Texas Jase Auby has voiced reservations about the total portfolio approach, particularly regarding the robustness of its central feature, the top-down decision-making process.

As CalPERS became the first US public pension fund to formally adopt the TPA, its peers from other states are closely monitoring the implementation process and what kind of portfolio benefits the approach would bring. But at a special board presentation on TPA in TRS’ February board meeting, Auby, who has been with the fund for more than 17 years, explained why the TPA philosophy diverges from his investment management belief.

“I do have the opinion that top-down decision-making is a more brittle process, you are kind of relying on one person or one small team of people,” he said during the meeting held at TRS’ Austin office.

“[This centralised portfolio thinking] is a little bit at odds with the journey we’ve been on at TRS for the last six years.

“Something I’ve really prioritised – it’s probably been my top priority – is kind of the opposite, which is… pushing authority and autonomy as deeply into the organisation as possible to give everyone at TRS autonomy within their area, as it’s well-defined with good risk control, to really push that decision making down.”

Auby also called into question the efficacy of TPA in improving risk-adjusted returns. He cited a 2020 paper from the Thinking Ahead Institute which concluded that TPA added 50-150 basis points in incremental return over SAA but flagged those estimates as “aggressive”.

It’s worth noting that a more recent study from TAI in 2024 suggests the TPA value-add over SAA is even higher, at 180 basis points per annum over 10 years. In an interview with Top1000funds.com, CalPERS CIO Stephen Gilmore says while that number is likely optimistic, he is targeting a 50-60 basis point uplift in alpha after TPA is deployed at the fund.

Does DAA work?

For some practitioners of TPA, dynamic asset allocation is one of the so-called ‘top of the house’ tools made possible by the approach. Auby highlighted NZ Super as one of the only asset owners that consistently reports the value-add it gains from the program. According to NZ Super’s 2025 annual report, its strategic tilting program is by far the biggest alpha driver for the fund as it added close to 100 basis points of active return annually over the past five years.

But Auby said DAA is not an area TRS prioritises – or wants to prioritise. He said TRS terminated its dynamic asset allocation activities in 2017, in a decision made by then CIO Jerry Albright to whom Auby was the deputy, after what were largely “8 years of futility”.

“We didn’t lose much money in the fund or anything doing it [during that period], but we never were able to prove a durable and long-lasting source of alpha for the trust by doing that,” he said.

“You know, sometimes don’t just do something, stand there. If you’re doing something that’s not working, stop doing it.”

Auby said compared to DAA, which he described as a “low breadth activities”, generating alpha through security selection is a more consistent approach for TRS.

“The math of trying to get alpha is, if you’re for example managing the S&P 500, and you can make 500 [active] decisions – it’s called breadth if you have many, many more decisions to make – that would result in a much more robust process, and better and more durable alphas than a process where for example you might only be making five decisions,” Auby said.

“And that tactical asset allocation decision-making is basically five decisions. It’s like: stock versus bonds, emerging markets versus developed markets, non-US versus US, private markets versus public.

“There just aren’t enough decisions and the decisions themselves are so consequential, it’s quite difficult to make money.”

The fund returned 15.9 per cent in the year to December 2025 and added 176 basis points of excess return but Auby didn’t share a breakdown of alpha sources. The prices of silver and gold, to which the fund has a 1.6 per cent allocation, have seen stellar rises to return 139 and 63 per cent respectively in the 2025 calendar year.

“Our alpha without that [DAA] activity has been very healthy – we have some of the highest alphas amongst public funds,” he said.

“It’s worked out well for us. But just because it’s worked out well in the past doesn’t mean we won’t continue to look at it.”

TRS has 58.83 per cent allocated to global public and private equities, 20.62 per cent to stable value assets (including bonds, absolute return and stable value hedge funds), 20.46 per cent to real return (real estate, infrastructure and commodities), and 4.82 per cent to risk parity strategies. The fund was 4.72 per cent leveraged.

At the end of last year, Swedish buffer fund AP4 completed a major transition to a single, integrated investment management platform provided by financial technology company SimCorp, part of Deutsche Börse Group.

The new system has taken years to come to fruition and covers every step of the investment process across the SEK 557.7 billion ($62 billion) portfolio from analysis and order placement to portfolio management, risk, performance, compliance and financial reporting, replacing several previous systems and increasing efficiency, transparency and flexibility.

“For the first time, we can follow the life of an investment from start to finish on a single platform,” says Nicklas Wikström, head of risk and operations at Stockholm-based AP4, who first dates the overhaul to 2016 when AP4’s incoming CEO Niklas Ekvall began pushing for a technological upgrade that he has championed ever since.

Getting rid of old systems

AP4 already used SimCorp’s Dimension platform, which it installed back in 1999. But over the years, the team had added on new bits of technology, developed internally and sometimes purchased externally, to allow new ways to manage portfolio performance, risk and alternative investments, creating multiple interfaces.

Now AP4 has phased out MSCI Barra and its private market analytics technology, Private I, as well as Bloomberg AIM and ORTEC’s performance attribution platform, to name a few. “There is a lot we’ve taken away,” says Wikström.

Although it is too early to count the cost of the savings, he expects that using a single system will lower operational costs.

It will also lower the risk from multiple platforms. AP4 staff only need to learn how to use one platform rather than multiple interfaces, and there is no need for consultant support either. Having one system in place has also got rid of the added complication of having to integrate multiple changes across the tech stack when one element needs upgrading.

“With one single setup, we can make adjustments in one place that encompass all the different investment processes. Many times, when you are working with multiple systems you need to copy or translate the structure between the systems.”

Under the old system, alternative investments sat on a side platform. Now alternatives sit on the main platform and provide a total portfolio view. “To have the total portfolio on one platform is really important for the allocation team. Now the allocation team can better understand the exposure, how alternatives fit with the whole portfolio, and how to tilt the total portfolio.”

But he reflects that there are also risks in too much standardisation. Forcing more complex parts of the portfolio to fit a single system setup can negatively impact the investment process. It is a question, he says, of finding a balance.

“When you try and optimise every part and activity in your setup, there is always a risk that the total won’t work that well.”

One area a single system has brought profound benefits is creating a single source of data.

Real-time information on trading, compliance, risk, performance and accounting sits in the same place in a single source of truth that reduces the risk of data reconciliation and improves data quality. Less manual processing in the system also means less risk for operational mistakes and faster execution, and more time for analysis and investment strategy for the portfolio managers.

“When we make an investment, the portfolio manager can see how it impacts the portfolio immediately. The information is sent through the system all the way to accounting. Before, we had to run batch jobs and move information from, say, Bloomberg AIM to SimCorp Dimension or from SimCorp Dimension to BarraOne. Now portfolio management is real-time, integrated and seamless, and much quicker.”

Wikström doesn’t believe that having one provider raises concentration risk or cyber risk. He reflects that SimCorp – which uses Microsoft’s cloud computing platform Azure – is the expert.

“I always think, ‘could we protect ourselves better than Microsoft?’ ‘Would we be able to push our own IT-security higher than Microsoft? Although we work a huge amount on IT and information security, the answer is ‘No.’ ”

Moreover, the cloud-based system replaces a legacy on-premise system which gives added security because it comes with a contingency anyway. “If it goes down in one location, we can switch to another environment.”

Future proofing

One of the most important criteria in the new system is that it can scale as the portfolio evolves.

The portfolio system is module-based. AP4 will be able to supplement the system environment with new functionality based on externally driven changes like new regulations, and meet the requirements of a forward-looking management organisation. New modules can be added to the system in a similar way to how a new feature is added to newer cars, although he notes that some configuration is normally required in addition to the cost of the module.

The system is also future-proofed in its capacity to integrate AI into the investment process. SimCorp’s investment platform uses Snowflake, the cloud-based data storage, analytics and processing software, to manage its data and this will increasingly drive AI integration in the investment process at AP4.

“We are still learning the system, and getting to understand different features, but we will increasingly use AI to get a better view of the portfolio and support decision making.”

Risks of integration

Reflecting on key takeaways for other investors pondering the same kind of tech overhaul, Wikström says the integration involved a wholly-focused internal team and consultants from day one: he advises against integrating new tech only on a consultant basis, however.

“You need to have committed internal resources involved in the project.”

Partnering with others also helps. Sister buffer fund AP3 conducted a similar overhaul at the same time, providing valuable input.

“We have been able to discuss problems and use our joint leverage on Simcorp to push for changes to the system and have been able to leverage each other’s experience and expertise. It also creates excellent conditions for continued close collaboration and joint development between the funds.”

He espouses the importance of a senior internal champion and committed sponsor. “Our sponsor is our CEO, who has been very involved. I would say this is crucial because it has allowed us to prioritise the project and move other things to the side. It’s important to have someone who can communicate the benefits of the technology for the organisation as a whole.”

Board buy-in is also important. “With this scale of project, you will always end up with challenges along the way. With the board involved, it is much easier to address issues that might arise along the way.

His final word of advice? “Always think twice about the time estimates that are made. If it sounds too good to be true, it probably is. This also caused problems for AP4 which was forced to postpone the go-live until after the summer and also use the summer break for extensive testing.

It is also important to start with a clear target operating model, and your expectations, he concludes.

“Be specific and detailed about the requirements in the agreement with the vendor and try to avoid scope creep.”

Published in partnership with IFM Investors

Asset owners hunting for new private market opportunities amid rising geopolitical volatility increasingly include Europe as a priority destination.

The shift in sentiment is clear: Half of global institutional investors now identify the region as a key target for infrastructure debt, and 44 percent for infrastructure equity.

“Infrastructure is increasingly seen as a way to generate alpha and boost portfolio performance,” said Mercer’s global head of real assets, Alan Synnott.

“In Europe, clients are typically drawn to infrastructure for its consistent returns and stabilising effect on portfolios. In Asia, approaches vary widely, reflecting the different levels of market development and sophistication across countries.”

Source: IFM Investors Private Markets 700 Global Investor Barometer 2025

The sustainability edge

One factor driving the appeal is Europe’s sustainable edge, with investors in North America, APAC, Europe and the Middle East listing sustainability as a financial driver for value creation and a top priority in their private market decisions.

North America is a long-term leader in energy infrastructure and data centres. But Europe also offers a well-established market with private sector participation across a range of sectors, giving investors broader exposure to themes, said Andrea Mody, head of North America, clients and strategy at IFM.

“Private infrastructure in North America is still evolving as an asset class compared to Europe, where the market is more mature, with its strong regulatory systems, history of public sector and private sector cooperation, and long track record of private sector capital in infrastructure,” Mody tells Top1000funds.com.

“Investors see Europe as an attractive destination, particularly those focused on sustainability and clean energy. When it comes to energy, North America is still viewed as an enormous market but it’s more an ‘everything, everywhere, all at once strategy’ rather than just about renewables.”

Europe’s leading position in renewable energy infrastructure represents a meaningful shift from just a couple of years ago when, according to Mody, North America was probably the leading place to invest.

“Some of the geopolitical changes, and question marks around energy security and defence, have caused hope for higher growth in Europe and investors are seeing Europe as an attractive and relatively safe destination where many investors believe they’ll have more policy certainty in the near term,” she said.

Growth, digitisation and decarbonisation

Asia Pacific (ex-Australia and New Zealand) ranks as the fourth most attractive region for private market investors, according to the IFM report, with 41 per cent looking at the region for infrastructure debt and 38 per cent for infrastructure equity.

When it comes to digitisation, IFM sees a lot of opportunities across the region, but especially in developing Asia where digital penetration rates are still very low compared to more developed markets.

Australia’s largest superannuation fund, AustralianSuper, has also identified digitisation and sustainability as strong themes and attractive drivers for the asset class. The A$387 billion fund has increased its allocation to digital infrastructure, particularly data centres in North America, over the last several years, according to Roger Knott, acting head of real assets.

Market appeal

The IFM Investors’ second annual Private Markets 700 report also found that different investors like private infrastructure for different reasons.

Investors agree that infrastructure can add diversification, stable income, and long-term growth to a portfolio, but certain characteristics stand out depending on regional priorities.

“As infrastructure strategies become more sophisticated, investors across regions appear to be aligning their capital with distinct priorities, whether focused on performance, stability or sustainability,” the report states.

Armit Bhambra

Among European investors, there are three key nuances, said Armit Bhambra, head of client solutions EMEA at IFM. They are a sharp focus on risk management, regulatory stability and sustainability.

“There is a significant focus on risk management, specifically diversification and inflation-hedging to build portfolio resilience,” Bhambra said.

“Investors in the region are concerned about inflation, with one cause being the evolving tariffs position in the US. Many are looking to private markets to help them insulate their portfolios from this risk. Asset classes like infrastructure, where revenues can be quite directly linked to changes in inflation, are increasingly seen as helpful portfolio construction building blocks.”

Regulatory stability

Bhambra said investors in Europe are also looking for regulatory stability because it enables them to make long-term high conviction investments.

“ ‘Our survey indicates that investors view Europe’s regulatory environment as an important factor when making allocations to private markets in the region, due in part to their long-term nature of those investments,” he said.

“Sustainability is really important to European and EMEA investors too, underpinned by a belief that the energy transition is unstoppable, irrespective of momentary political changes and momentary thematic changes.”

At AustralianSuper, sustainability is deeply embedded into the group’s governance and stewardship practices.

“ESG (Sustainable Investing) is something that we’re very attuned to,” Knott said in the IFM Report.

“Environmental impacts, governance and other social issues are front of mind across our investments. In infrastructure we pay strong attention to supply chain and labour condition standards.”

According to the research, infrastructure’s defensive, sustainable characteristics have special appeal to EMEA and Asia Pacific investors, while in North America, investors appear to be drawn to the asset class’s growth potential, especially in private infrastructure.

In North America, 48 per cent of infrastructure equity investors cite higher returns as their primary motivation, based on IFM’s research.

The IFM report found that North American investors expect net returns in the vicinity of 13.5 per cent from infrastructure equity and 9.7 per cent for infrastructure debt. This compares to 11.8 per cent and 7.7 per cent year‑on‑year in 2024, respectively.

Awash with opportunity

McKinsey estimates that US$106 trillion in global investment will be necessary through 2040 to meet demand for new and updated infrastructure.

While deal activity has remained robust in recent years, current levels of private infrastructure investment continue to fall materially short of what is needed, underlining the scale of the challenge and opportunity ahead.

There is no shortage of investment opportunities, Mody said.

“There is positive deal flow right around the globe,” she said.

“Australia is a smaller, more mature market but that doesn’t mean there aren’t opportunities there, and Europe is interesting, particularly around energy security and defence.”

When it comes to building infrastructure assets, different regions are moving at different paces, but every country and region recognises that they need to go on this journey, said Bhambra.

“China, Europe, North America and the Middle East are all running their own race, and some [regions] are long energy or long technology and it’s really interesting to observe,” he said.

“It is important to focus on quality and choose high-quality assets because in every category there is a spectrum. An experienced manager knows how to spot the difference.”

Australia’s third-largest pension fund, Aware Super, is considering a return to infrastructure funds after years of favouring direct investments. The infrastructure allocation currently stands at $15 billion and the fund sees benefits to access a “broader set of offerings” and opportunity sets via fund commitments to GPs, its head of infrastructure Mark Hector says.

The A$200 billion ($141 billion) Aware Super is considering a return to infrastructure funds after years of favouring direct investments in a bid to access more diversified assets via good-quality GPs, and juice up performance.

Head of infrastructure Mark Hector, who oversees the A$22 billion ($15 billion) infrastructure portfolio of which pooled funds represent 20 per cent, sees benefits to some investments via funds to access a “broader set of offerings” and opportunity sets via GPs.

While Aware Super’s infrastructure return has been “pretty good”, Hector says it has a way to go in becoming one of the consistently top-performing funds among the peer group.

“So questions have naturally been asked about, well, how can we go from being kind of good to great?” he tells Top1000funds.com in an interview from Aware’s Sydney office.

The answer may lie in an expansion of GP relationships as Hector believes there are a lot of managers who haven’t shown Aware Super its offering at all. “You don’t know exactly what those deals were like that you’re missing out on because you don’t necessarily get all that data,” he says.

“With some of the managers, their first port of call is always the LPs that go into their pooled funds who sign up contractually and get certain co-invest rights, and if they don’t take them up, or the deals are too big, then the GPs can go outside of their LP base to other investors.”

Aware has been mulling over a pivot to funds in the past year and will soon present the proposal in front of its investment committee.

“We haven’t really contributed any incremental capital to pooled funds for several years and a lot of that’s been focused around fees, but we’re doing some work at the moment where I think there’s a reasonable case that the fee strings might be loosened a little bit,” he says. Australian pension funds are highly conscious of costs due to pressure from Your Future Your Super, a regulatory performance test.

Aware has 16 professionals in its internal infrastructure investment team spread across the Sydney and London offices.

The strategic shift comes after Aware Super’s outgoing deputy chief investment officer and head of international, Damien Webb, foreshadowed at the Top1000funds.com Fiduciary Investors Symposium last November that the fund’s needs as an LP are changing as the fund grows.

Aware also wants to formalise some “ad hoc” relationships it has with current GPs. Macquarie Asset Management is a good example – even though Aware is not in any of the MAM pooled funds, Aware’s reputation of being a sophisticated investor means it’s a “natural port to call” when MAM is looking for partners in complex deals, Hector says.

The two completed a A$5.2 billion ($3.6 billion) acquisition of TPG Telecom’s fibre assets last July alongside its portfolio company Vocus.

“There’s nothing formal in place [in terms of contact with MAM]. We all each know that we exist, and we talk all the time about potential opportunities,” he says.

“But we do think there’s a world where we could formalise certain relationships, focus areas a little bit more, including a broader relationship where we can potentially put some money in pooled funds, and in return, we see a broader set of offerings.

“The hope, or the expectation, is that can help to produce an opportunity set that produces some returns that are even better than what we’ve been getting.”

Data lores

To generate alpha within private markets, the fund has formed an ‘AI working group’ that sits across its real assets and private equity team to bolster the collection and usage of unlisted asset data. Hector says artificial intelligence can do much more in helping better determine and price risks.

The project is among the first changes ushered in by Aware Super’s newly minted CIO, Simon Warner, who wants to cement the fund as a data and AI leader among super funds.

“One of our nirvana thoughts is in private markets… there’s a lot of information out there that is highly confidential and non-transparent, [but] you’ll find that increasingly over time more data will hit the public domain,” Hector says.

“For example, if you’re looking at a data centre investment and right now you don’t have access, wouldn’t it be fantastic if right next to you, you could look at 100 other data centre investments and make direct comparisons on a whole bunch of different investment parameters?”

The fund is in the midst of hiring external experts to nut out the scope of the project but Hector says the various private markets teams have some crossovers on their AI wish lists. For one, the teams all tend to get inundated with market and asset information from GPs, but AI could help extract – as an example – the reasons for over or underperformance in certain assets or sectors by summarising these external data files.

Data availability from fund managers hasn’t been a problem for Aware due to the limited allocation it has in pooled funds, but Hector says “some managers are better than others at being more open and transparent” with the level of information they provide.

Above all else Aware is most concerned with the accuracy of valuation, Hector says. Australian super funds face stringent requirements from the prudential regulator, APRA, to perform independent and regular valuations of unlisted assets and ensure accurate representation of performance.

“Across Europe and North America, generally speaking, there’s a lot of valuations that will be called independent, but they’re not. They’re done by independent internal valuation teams within GPs,” Hector says.

“They might get an external accounting firm to opine on that valuation, but that’s different to a to… a third-party firm doing their own genuine bottom-up assessment evaluation.

“Our problem is that it seems to be mostly just the Australian pension fund base that are really pushing the GPs for this [independent valuation]. They’re not getting those messages as much from pension fund systems in the Northern Hemisphere.”