Top1000funds.com

In an endorsement of its hard work over the last year, Sweden’s Fund Selection Agency (FTN), the government agency charged with procuring and monitoring the funds on offer on the country’s premium pension platform, is already starting to see improved returns and lower fees from the wave of new equity funds it mandated last year.

“Comparing the new universe of equity funds to the old universe reveals a 150 basis point improvement,” Erik Fransson, executive director at FTN tells Top1000funds.com. In keeping with the organisation’s stated aims, the main contributor to that added value is higher performance, accounting for 125 basis points. The remainder of the benefit (25 basis points) comes from more favourable pricing or lower fees.

“It is a case of so far so good: we have come a long way and we are really satisfied with the work so far,” says Fransson.

Working Swedes have paid into the mandatory defined contribution state pension fund ever since it was established in 2000 and assets on the platform are forecast to double to $451 billion by 2040. Today, the entire “premium pension system” accounts for around $232 billion split between the FTN and default fund AP7 which manages a default option for savers who did not make an active investment choice. Members of the system can choose the level of risk and strategies for their savings.

The ongoing overhaul was rooted in a handful of fraudulent and other poorly performing funds on the platform in the past, a consequence of lax requirements on the funds offering their wares. In recent years, the number of funds on the platform has dropped from 900 to around 450 in a drive for quality that resulted in many falling away. The FTN will procure funds worth around $116 billion between 2024 and 2027.

Tier 1 institutional pricing

FTN’s latest mandates to both passive and active large and mid-cap Swedish equity fund managers show the direction of travel.

In passive, three fund managers have been awarded SEK 65 billion ($6.8 billion) across five funds. The average charges were 3.9 basis points, reduced from a “rich” 12.9 basis points and mandates were won by managers with more sophisticated risk mitigating strategies including how they handle changes in the index and the different index constituents, as well as experience with strategies like security lending.

“This is really close to Tier 1 institutional pricing and will add a great deal of value in the long run. It’s very exciting and we are satisfied with this especially as we are doing this in a fund format. Contrary to popular belief, not all index funds are created equal – the selected funds show strong value creation potential,” says Fransson.

The SEK 92 billion ($9.7 billion) allocation to seven active fund managers was awarded across ten funds and also achieved a “big reduction” in fees, down from an average of 30 basis points to 15 basis points.

In another endorsement of the jump in the quality of fund managers bidding for mandates, Fransson says that none of the managers were disqualified due to mistakes or poor responses. The value of assets under management in the categories won’t change under new management so managers have a clear idea of the amount of assets they will be able to manage from day one if successful, helping the agency secure the best price.

Managers pay a tender fee and if they are successful, a platform fee based on assets under management. These requirements have successfully deterred managers without a good chance of success from going through the lengthy RFP process. All FTN’s costs are financed by an annual fee of 0.5-1.5 bps of assets under management on the platform.

Tech funds and fixed income up next

In the next step, the organisation will announce the $11 billion allocation mandates for a series of new tech-focused funds. Once funds are selected to manage these assets, some 55 per cent of the total capital on the platform will either have been mandated or in process, equivalent to 90 per cent of the equity category.

The team is also working on $23 billion global equities mandate divided between European small-cap and Swedish small-cap.

Work to secure successful procurement of next year’s mandates to new fixed income and target date funds, balanced funds and liquid alternatives is already underway with a focus on adjusting the RFPs and designing the search. All funds have a daily NAV, and most will be UCITS compliant. There is no plan to add private markets to the mix.

Rolling out a total portfolio approach is rarely a linear process, as even its most experienced practitioners have warned that without careful resistance to old language, culture and structure, asset owners can easily slide back into the “comfort” of strategic asset allocation.

Despite having adopted a TPA mindset since it was established in 2006, Australia’s Future Fund is still constantly resisting a “gravitational pull” back towards SAA-like tendencies, according to its former chief investment officer, Ben Samild, who was interviewed for a TPA report published on Tuesday.

The A$318 billion ($209 billion) fund avoids words such as “my portfolio”, “benchmarks”, “sleeves” or “asset classes” in its institutional language and promotes “growth”, “income”, “portfolio impact” and other whole-of-fund focused terms. But old ways of thinking often re-emerge especially during times of stress.

Externally, peer comparison, consultant inputs, board renewal and media narratives can impact the sentiment of investment teams.

“When most of your peers are using SAA, it’s hard to be the odd one out,” read the report published by the CAIA Association and the Thinking Ahead Institute.

“No TPA shop has actually ‘made it.’ For these organisations, it’s not about achieving or arriving at TPA status, it’s about resisting regression.”

The TPA framework can also become less effective following a change in organisational structure resulting from a rapid expansion of mandate, assets or team headcount, but solutions to this problem can look different for various asset owners depending on their set-up.

Some, like Australian state sovereign wealth fund TCorp, facilitate TPA collaboration by intentionally keeping a localised office and leveraging the proximity of its investment team.

But Canada’s CPP Investments addresses the problem by expanding the usage of its completion portfolio, which was originally a “quasi-balancing/overlay portfolio” and has evolved to amplify or offset views from positions held by its bottom-up team. This maintains the flexibility allowed by a top-down view while benefitting from inputs from its on-the-ground, geographically diverse investment professionals, the report said.

Asset allocation impacts

In shifting away from SAA to TPA, asset owners are switching from a tracking error-driven to an opportunity cost-focused mindset, and one of its biggest manifestations is the way assets tend to be funded.

For example, CPP Investments coordinates capital allocation decisions through a central investment committee which helps avoid “rigid deal-by-deal trade-offs” among bottom-up teams. Singapore’s GIC manages an overlay portfolio from the CIO’s office which addresses short-term funding needs or thematic exposures without disrupting long-term allocations.

The report points out that this leads to a difference between tactical asset allocation in SAA and its equivalent in TPA: while the former is always in a mindset of “deviating from the constraints set forth by the governing body”, which are the policy benchmarks, the latter can act without them and identify what’s truly beneficial for the portfolio.

Another asset allocation impact of TPA is that it gives funds ways to embrace more “esoteric” asset classes, such as insurance-linked securities and volatility-linked strategies.

It also allows for more creative allocation decisions. Australia’s Future Fund combines defensive hedge funds with zero-to-negative beta and “substantial” venture capital exposure, for example.

“While Future Fund didn’t go through a transition from SAA, this is a great example of how a TPA portfolio deviates meaningfully from peer portfolios that maintain more long-only beta benchmarks and exposures,” the report said.

“These diversifying positions, while unconventional by SAA standards, were integrated for their utility in improving resilience and achieving objectives like inflation protection or return asymmetry.”

Total view of risk

The report observes that under TPA, funds tend to be willing to tolerate higher tracking errors relative to a reference portfolio, which is a low-cost, index notional portfolio that aligns with an investor’s risk appetite and investment horizon.

This could be a result of TPA practitioners focusing more on the total fund objectives, rather than prescriptive measures in risk management, the report said. TPA funds can focus on a variety of key risk indicators including shortfall risk, surplus variability, or drawdown and recovery resilience rather than “measuring volatility for its own sake”.

Canada’s University Superannuation Scheme (USS) focuses on funding gap volatility as a key risk indicator to manage its liabilities and responsibilities to beneficiaries.

GIC, meanwhile, keeps a close track of long-horizon strategic risks and short-term market dislocations by managing risk across three layers: long-term policy portfolio, 10-year strategy buckets, and 3-5-year overlays.

There is a lot of creative room afforded by TPA for investment problem-solving, but the report highlights that one of its drawbacks is complex governance.

“Boards must trust management to make judgment-based decisions that align with long-term goals. Management must trust teams to collaborate rather than compete. And investment professionals must trust that their value is measured beyond a benchmark,” it said.

“As Geoffrey Rubin, senior managing director and chief investment strategist of total portfolio management framed it: The role of the governing body is to set the problem up very clearly. Then the question is: how much latitude does management have to solve it?”

The $50 billion-plus South Carolina Retirement System Investment Commission’s (SC RSIC) shift into positive cashflow has enabled an increased allocation to private equity and private credit.

The changes, which are expected to boost long-term returns, took effect on July 1 following a five-year strategic review.

“The better that liquidity position is, then it gives you a greater ability to have more exposure to the things that we think are going to add value over their public equivalents over time, like private equity, private debt, private real assets and hedge funds,” chief executive officer Michael Hitchcock said in an interview with Top1000funds.com.

Funding reform, improved salaries, and positive investment returns have flipped the defined benefit plan’s position from about four per cent cash outflows in 2016 – roughly $1 billion of annual outflows on its then-$30 billion size – to about one per cent cash inflows today.

“That’s self-reinforcing because you don’t have those outflows, you’re able to invest in the things that are giving you a better return. So that really has a multiplier effect for helping improve funded status.”

Private equity was boosted by three percentage points to 12 per cent of the portfolio while private credit was increased by one percentage point to eight per cent. Those tilts were funded from the plan’s equity and bond allocations.

Interim chief investment officer Bryan Moore said private equity was SC RSIC’s “purest expression of risk”.

“Back in 2019, we were talking about having a nine per cent private equity target – we were always underweight private equity,” he said.

“We didn’t have a very consistent deployment schedule and we really refined our sourcing methodology, as well as our use of co-investments, and that has very much allowed us to move this portfolio into something that feels very high quality.”

The fund targets smaller managers and co-invests alongside them to moderate the impact of the J-curve.

Over three years, the asset classes that delivered the highest excess returns above their benchmarks were real assets ($922 million added return), portable alpha ($675 million), and private equity ($480 million).

Infrastructure makes up about one-quarter of the fund’s real asset portfolio (about 3 per cent at the plan level) and has provided strong consistent cashflows that match the plan’s long-term liabilities.

“We really want to get the more core-like infrastructure assets that look and behave like infrastructure assets versus opportunistic where you’re using maybe an infrastructure asset, but with a private equity playbook,” he said. “We’re not doing infrastructure that has more of an operating company play to it.”

The fund’s portable alpha strategy has also delivered, adding about $1.8 billion to the plan since 2018 with no down years, Moore said. It uses Treasury futures to fund its exposure to equity market-neutral and multi-strategy hedge funds.

“I think scalability is going to be hard as we think about a plan that’s growing. We have a lot of relationships from when we were $30 billion plan that no longer need more capital, that are returning profits to us.”

While the SC RSIC is banking on private assets to deliver long-term outperformance, it was strong equity markets that drove the bulk of its 11.34 per cent net gain in 2024-25. Its equity portfolio is passively indexed to the MSCI ACWI IMI Net index.

Equities make up the bulk of its portfolio, which was simplified in 2020 across five asset classes: public equity (43 per cent), bonds (25 per cent), private equity (12 per cent), private debt (eight per cent) and real assets (12 per cent).

The fund has held its position close to benchmark across the calendar year given high levels of uncertainty following the Liberation Day announcement in April.

“There’s so much noise happening in the world right now that we’ll see what wave crashes, and then we’ll adjust the portfolio as we see that happen, but I think that’s where having that optionality and the ability to counterattack is really a valuable part of our portfolio.”

The US has long been the global leader in technology innovation, with Silicon Valley and the entrepreneurial spirit that pervades it putting American companies at the forefront of global equity markets for decades.

But China is now challenging that lead, Ben Way, head of Macquarie Asset Management told the Top1000funds.com Fiduciary Investors Symposium at Stanford University.

“The US is the most innovative and entrepreneurial economy. However, across a range of tech and energy sectors – advanced materials, hydrogen, robotics, synthetic biology – you can make the case that China is leading. And I think this is one of the stories that’s quite misunderstood. It’s an interesting debate to be had about who is currently the most advanced.”

Shenzhen – where Way has visited BYD’s Pingshan campus – looks like “the city of the future”, and is a hotbed of technology and innovation, led by robotics and EV technologies.

“The ability of CATL (EV battery manufacturer) or BYD to produce more and more advanced technologies at scale at 7-sigma precision is real. Especially when you consider other competitors are struggling to deliver innovation at 6-sigma.”

But Way said that “massive” opportunities like decarbonisation, deglobalisation, demographic change and digitalisation aren’t limited to these two superpowers – and that he’s more excited as a real assets investor today “than at any other time” in his career.

“For example, today, you can deploy large-scale capital in Japan, including taking control of companies across multiple sectors. That wasn’t a huge opportunity set 5-10 years ago,” Way said.

“You can do the same thing in Korea, which is our biggest market in Asia. We have some 40 portfolio companies there today dating back to the early 2000s. That has been a market where you could have an impact at scale for some decades – we helped build the bridges and the roads that allowed Korea’s economy to really pivot into tech export after the Asian currency crisis.

Macquarie is also exploring emerging markets for deals. While some sectors are fairly richly valued at the moment, the opportunity set is staggering. For example, the vast majority of India’s vehicles still run on old diesel engines, and in a nation of 1.4 billion people, the opportunity to electrify and modernise transport is “significant and needed”.

“Opportunities are coming from everywhere. The rise of deglobalisation, particularly around security – whether it’s supply chain security, critical minerals security or energy security – is creating a new opportunity set in most countries around the world, particularly the top 30 investable markets for institutional capital. This thematic is much more pronounced than it was five years ago.

So, while I wish the world was calmer, while I wish there was less polarisation, while I wish for less volatility (and fairer access to education) … I am excited about the real assets opportunity set, and I am an optimist.”

Matt Pottinger, the former US deputy national security adviser during the first Trump administration, has warned that China could spark “a very serious crisis” in Taiwan without even resorting to a full-scale war – an escalation he said could occur in the next four years and should “keep President Trump and many more people awake at night”.

The comments came soon after China marked the 80^th anniversary of World War II and the Second Sino-Japanese War with a military parade at Tiananmen Square, where President Xi Jinping addressed over 12,000 troops of the People’s Liberation Army in a decisive show of national security force.

Also present at the parade was Xi’s close ally, Russian president Vladimir Putin, who is escalating his war against Ukraine. This worries Taiwan’s defence ministry, whose deputy chief of the general staff for intelligence Hsieh Jih-sheng recently told an international security conference that the defeat of Ukraine could embolden China to seize Taiwan.

But Pottinger said there are many ways for China to make Taiwan’s life harder without initiating a hot war. For example, the Chinese government could issue a notice to the world’s major shipping companies – which are predominantly Asian and European – requesting that access to Taiwanese ports be granted only with its permission.

“That immediately will put the world’s shipping industry on the horns of a dilemma,” Pottinger, who is distinguished visiting fellow at the Hoover Institution, told the Fiduciary Investors Symposium at Stanford University.

“They will either have to salute and basically cede the idea that Taiwan has any sovereignty, even over its own trade, or they risk not being able to do business with China, which will collapse most of the world’s shipping companies.”

China’s focus on Taiwan reflects its strategic significance in the region as well as their complex cultural and historical ties. Claiming Taiwan would be a “strategic coup” as it would allow China to break free from the geographic constraints of its military power – the so-called “first island chain”, Pottinger said.

“Anytime China wants to send its ships, submarines and aircraft, they really have to go through a toll booth and be permitted to do that,” he said.

“So Chinese military doctrine says if we take Taiwan, we can effectively surround Japan, collapse the entire strategic defensive concept for Japan, and cut off Japan’s access to energy and even food.”

The fact that even a “bureaucratic circular” could set off a serious crisis in Taiwan should make the US and the world very concerned, he added.

Meanwhile, having worked with Trump in his first term, Pottinger said the president is “someone who does not actually prioritise national security”. Trump’s focus leans towards tightening immigration policy – which to him, is a form of economic foreign policy rather than a security policy – and expanding his control over other levers of power such as the Federal Reserve and the media.

Adding to potential myopia in the US’ security strategy is the fact that Trump gutted the National Security Council this year.

“As of a month ago, there were only about 36 policy staffers in the White House working on national security. To put that in context, that’s sort of around where it was at the dawn of colour television,” Pottinger said, adding that these functions have been effectively replaced by private sector advisers.

“[These are people like] David Sacks, who is a part-time AI and crypto czar; Jensen Huang, who is not at all a government official, but is the lead adviser – really replaced Elon Musk – to the president on technology and AI, including national security implications of those things,” he said.

“We’re in a weirder space, I would argue, than we were in the first administration where President Trump was surrounded by generals… and they would bring up [national security] things before it was a crisis.”

Looking ahead at the US-China relationship, Pottinger said Trump will be caught between the “hard realities” of trying to impose tough tariffs on China, and realising China is making speedy progress on its decoupling from the US.

“[Xi] may agree to buy some new shipments of soybeans or a few more Boeing jets, but he’s not going to shift his economic model, which is… explicitly making China independent of any inputs from the United States and other industrialised democracies.”

At the end of Trump’s first term, he was under pressure politically because of the havoc that the Covid pandemic wrought on the US economy – a “grievance” he has been nursing since 2020, Pottinger said.

“[If Trump meets with Xi later this year], he’s going to come away with a few soybean sales, and he’s going to start through that cycle of nursing grievances again.”

“Everything is permissible, but not everything is helpful.” 1 Corinthians 10:23, International Standard Version

In my last thought piece on misinformation (Data ‘slop’ and disinformation emerge as systemic risks for investors), I noted the likely ballooning in quantity of ‘AI slop’ (AI generated information) that we will have to deal with in our search for meaningful information as time passes.

This reminded me of the TS Eliot quote, “Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?”.

This implies a hierarchy, where volume and value are inversely correlated. Think of a shallow-sided pyramid where there is masses of data at the bottom, which must be filtered into rarer information, which must be heavily filtered into knowledge, which in turn yields only a few nuggets of wisdom.

My argument in this piece will be that intelligence is not our goal – whether artificial or not. Our goal should be the much more valuable wisdom. Now, if we were to start hearing about ‘artificial wisdom’ then maybe we would be on the brink of something interesting…

In the Institute we have, occasionally, promoted the idea that ‘wisdom’ equals ‘what I should do on Monday’. If the implication is that we have spent the weekend in thought and reflection, and the emphasis is placed on the ‘should’, then maybe all is OK.

But in the absence of reflection, and if the emphasis is on the ‘do’, then we have likely introduced a bias to action which could run directly contra to wisdom. This piece will argue that a large part of wisdom lies in ‘not doing’, even though we could – or are tempted to.

The next idea I want to introduce is the Jevons paradox (see The efficiency trap). The paradox observes that increasing efficiency should lead to us using less materials, but we actually end up using more (because the price drop makes other uses newly viable).

Jevons was commenting on the efficiency of steam engines, which should trigger a fall in the use of coal. But cheaper coal led to more steam engines for more uses, and more coal was burned in total. Economic history from that time to the present is littered with similar examples.

Contrast this ‘reality’ with a story, possibly apocryphal, that I heard recently about an indigenous people group. They innovated a new fishing hook which made their fishing more efficient. Through the lens of our reality we would expect more fish to be caught, and to be put to more uses (feeding livestock, or selling).

Instead, they spent less time fishing. They enjoyed the same amount of fish, exerted no new pressure on fish stocks (sustainability!), and had more time to invest in social capital.

The fundamental difference between these two possible paths is best captured by the word ‘constraint’.

I will label the first path, of catching more fish and selling the excess, the ‘increasing financial capital’ path. It is relatively unconstrained. The same amount of time is spent fishing, the same amount of time can be invested in social capital, and the group will have more financial capital.

There is a big implicit assumption, however, that the new, higher rate of extraction is sustainable. If it isn’t… well that is a problem for the future. If the financial capital is stewarded wisely, it can possibly be converted back into fish later.

The second path I will label as ‘increasing social capital’.

There are a couple of possible implicit assumptions here (when viewed through a Western lens).

First, that the current rate of extraction is sustainable while a higher one might not be. And, second, that social capital is more valuable than financial capital. There is also a fairly heavy constraint – either self-restraint, or community-imposed – to catch fewer fish than they could.

So, which course of action is wiser – increasing financial capital or increasing social capital?

I am not claiming there is an easy or obvious answer to this question, as the Western and indigenous lenses may conflict. It will depend on the objective function, the time horizon and the beliefs.

However, one of them looks unarguably riskier (the financial capital path carries the risk of over-fishing). And, if we extend our time horizon to include multiple future generations, then the wiser course of action increasingly looks like the social capital path (there is less chance of existential risk).

To me, therefore, intelligence is a device for expanding the opportunity set, while wisdom is a device for shrinking it – “everything is permissible, but not everything is helpful”.

Now comes the hard part: how do we sift the dirt pile into those things we could, but shouldn’t, do – and those things that will be helpful over the long term (the jewels)?

Again, I cannot provide an easy or obvious answer. If I may, I refer back to a previous piece I wrote, titled What’s love got to do with it?.

In it I talked about head knowledge and heart knowledge, and argued that heart knowledge had access to all the same inputs as head knowledge but, rather than run them through a cost-benefit analysis, it ran them through a ‘love algorithm’.

I think this is the closest I can currently get to wisdom. If the proposed course of action expands the boundary of love – for others, for non-humans, for life not-yet-born – then it is likely to be wise.

If it shrinks the boundary of love, for example by inflicting cost on others, on non-humans or on lives not-yet-born, then it is probably intelligence rather than wisdom.

Tim Hodgson is co-founder and head of research of the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.