Page 11 – Top1000funds.com

Whenever Yolanda Blanch is making decisions, she thinks of the Cobra Effect. Blanch is the chair of Spain’s largest corporate pension fund, the €7 billion ($7.9 billion) pension fund for Caixa Bank employees (Pensions Caixa 30).

Also known as the “law of unintended consequences”, it refers to how attempts to solve a problem can often end up making it worse. It often occurs when an incentive, meant to encourage positive behaviour, inadvertently encourages the opposite.

The story goes that to deal with an excess of cobras attacking people, the Indian government offered a bounty for every dead one. People began breeding cobras to pick up the payment, and when the government cancelled the bounty, farmed cobras were released into the wild, exacerbating the problem.

“The Cobra Effect is an example of not implementing systems thinking in a complex and interconnected world,” says Blanch, whose leadership of the 25-year old pension fund since 2023 (she worked as an FX options trader at Caixa Bank for 20 years before that) aims to follow a systems approach which seeks to understand the relationships and interconnections within a system rather than just its individual parts.

A systems approach requires systems leadership, and Blanch invests a lot of energy in ensuring employees are thriving so the investor can tap into all the knowledge and talent it has available. She says systems leadership involves creating the conditions for others to think and express themselves clearly, ensuring psychological safety in an atmosphere of collaboration, communication and trust.

“In a complex world, no one can know about everything. I think the days of a leader who knows everything and decides everything is over. Now leadership is much more about being of service to others,” she reflects.

Systems Leadership in practice

Caixa’s 15-member supervisory board administers the fund, decides the investment policy and approves performance and return expectations in a wide-ranging and active remit.

Blanch views the rest of her board as a source of unique individual talent and ideas. “I try to approach everyone with humility and curiosity, and encourage debate,” she says.

Elsewhere, the parameters of board meetings have been laid out after guidelines were established to shape the kind of meetings the organisation wanted and protect against the risk of unruly meetings muddying decision-making.

“We’ve agreed that creating space for everyone to contribute without interruptions, and keeping our interventions concise, ideally under three minutes, helps us reach better outcomes,” she says. “In a complex world, we need to make room for diverse perspectives. We value what each person brings to the table, and believe that thoughtful listening and inclusive dialogue are essential to finding the most balanced and effective solutions.”

Blanch also bases her leadership on an acceptance of the reality we live in and approaches every day from a place of trust, not fear.

“Most human beings want to create a better world. What’s challenging is that we don’t always agree on how to get there,” she says, adding that she is encouraged by the strong example of soft skills in pension fund leadership.

Over the years, the pension fund has honed a reputation for excellence in investment governance. In 2016, trustees drew up seven investment beliefs to improve decision-making and achieve better outcomes, and in 2018 it approved eight SRI-related investment beliefs.

More recently, trustees carried out a deep dive into the asset allocation, centred around analysis of the distribution of accumulated assets across the current and forecast membership, and the risks implied by the various drawdown methods that the scheme offers its members.

Board discussions currently focus on shifting geopolitics, the beginning of a new era away from globalisation, and the potential for more collaboration in European capital markets. Elsewhere, she wants to begin exploring plan members’ appetite for lower returns vis-à-vis sustainable investment, a conversation she believes needs to be had because maximising returns at all costs increasingly conflicts with sustainability.

“One of the important challenges we face is the tension between the demand for continued economic growth and the environmental limits of a finite planet. As fiduciaries, our responsibility remains to deliver strong, long-term returns for plan members.”

Should circumstances ever evolve in a way that requires reflecting on how sustainability and financial performance interact, we would of course take careful account of members’ views and sensitivities. So far, sustainability and profitability have often aligned well, but we are aware that future scenarios could be more complex and will require thoughtful, balanced consideration.”

Other longer-term projects include exploring impact investment in the illiquid allocation that will complement sustainable investments in thematic equities and fixed income via a social bonds portfolio.

The board re-evaluate the pension fund’s strategic asset allocation every year (it isn’t modified every year) and also closely follows tactical decision making. All investment is managed by Caixa’s fiduciary manager VidaCaixa, Spain’s largest asset manager, also owned by Caixa Bank

“We are really close to the investment process,” she says.

The portfolio is divided between equities (30 per cent), illiquid assets (20 per cent) and fixed income (50 per cent) “Global equity has proven resilience in the long run,” she says.

The investment objective of the Pension Fund is to achieve an annual return (measured on an annualised basis over 5 years) in line with the 3-month Euribor + 2.75 per cent. At the end of 2023, the 15-year return was 5.46 per cent and the 5-year return was 5.81 per cent. The level of risk associated with this objective should be in the region of 10% (measured through annual volatility).

“When we reach a certain age in life, usually professional ambition and ego no longer primary focus, I think institutional investors understand the challenges and contradictions on the table. ”

APG Asset Management which manages €552 billion ($624 billion) for Dutch pension fund Stichting Pensioenfonds ABP is pondering increasing its existing $2.5 billion allocation to the defence sector.

“Defence has always been on our radar; we haven’t excluded it,” says Ronald Wuijster, chief executive of APG Asset Management. “We are already in this sector and could do a bit more over the next five years.”

Many European pension funds cap investment in the defence sector and exclude defence stocks because they fall foul of ESG filters. Yet geopolitical uncertainty and continued war in Europe is leading the continent’s pension funds to review the ethics of investing in the industry.

Wuijster prefers to frame the argument to invest more in defence around security rather than buying weapons.

“Defence is a means of security. Everyone appreciates security, including members of pension funds.”

In this way, investments could include assets like dual usage technology comprising quantum computing, cyber security or radar and drone technology. Other potential investments could include owning and investing in military buildings whereby pension fund investment frees up government budget to invest more in weapons, indirectly playing a role.

He said any increased allocation must fall within the boundaries of a good return and benefit the world from a security perspective. He also warned that any additional investment must begin with government leadership. “It’s not the role of a pension fund to defend a country or a region, it’s the role of government. It starts with the government and then pension fund investment could play a role.”

Investing in security for impact chimes with wider investment themes around impact and infrastructure where ABP plans to allocate more following its announcement to invest $34 billion in global investments with real world impact.

The impact allocation will have a strong focus on infrastructure where ABP targets around $12 billion in climate and biodiversity investments; assets like affordable housing and the energy transition will account for the remaining €10 billion.

“We are interested in expanding infrastructure because there is a big demand and it’s a way to have an impact,” says Wuijster.

Although most of the investment will be focused on private markets, Wuijster says APG will also invest for impact in the capital markets.

APG Asset Management’s latest one-year investment return of 8.9 per cent reveals that private markets lagged public markets. Although the allocation to private markets has performed well and beaten peers and benchmarks, the stellar performance of tech stocks in the Magnificent Seven outshone private markets. Wuijster cautions it’s far too short a period to compare public and private markets due to the different principles used to determine valuations.

“To do that, you need to take a longer period, perhaps even 10 years,” he says.

He remains confident that the private equity portfolio is well positioned and says the team are comfortable entering new investments. “We don’t think we have exaggerated valuations in our portfolio analysis. Actually, the portfolio is conservatively valued.”

Still, he notices that broad private equity market valuations have moved up higher and investors are struggling to realise investments in an environment where listings are difficult. The latest challenges also serve as a reminder that private equity is not better than other asset classes “every year” and is not “a guaranteed bet.”

Wuijster is also spending time fine tuning total portfolio management. Balance sheet and asset liability management has always been a key policy at APG, but has become more important in recent years driven partly by the country’s migration to a new pension system guided by new laws that places more emphasis on asset liability.

He says total portfolio management strategies include homing in on hedging interest rate risk and how best to deliberately manage currency risk given it’s also a diversifying factor. Liquidity, and optimal diversification of the portfolio across strategies and names, also falls under total portfolio management. He adds that it is distinct from LDI which is more insurance-orientated does not include allocations to risk.

“Pension funds should take a certain amount of risk,” he says.

The challenge of long term investing

Wuijster also reflects that it is getting more difficult to be long-term.

The attention the investor attracted when it sold a $585 million stake in Tesla on behalf of its main client late last year as part of an “optimisation strategy” in the index portfolio was a case in point. Wuijster reflects how “many people found” the decision “strange” because Tesla’s share price increased in December 2024, yet the strategy attracted praise when shares declined in the first quarter of 2025. Yet neither was merited because both analysis is based on short-term analysis.

“We invest based on inclusion, in which criteria such as climate, biodiversity, human rights, and good governance play a role. This policy results in a very diversified portfolio that historically yields a return comparable to the broad market; is very well diversified, liquid, and expected to be more resistant to risk. If you change the strategy and move from one approach to another, that implementation costs money. That cannot be avoided. That result should, therefore, not be judged in the short term.”

“It’s not that we are not analysing and can’t act on a particular day, but we are in for decent return at responsible risk level and pension fund asset management is about balance or risks and return for a long-term horizon.”

APG invests based on analysis of four elements comprising return, risk, cost and sustainability, and that hasn’t changed,” he concludes, adding that sustainability has never dominated every other element and can’t go at cost of return but its valuable information for risk management purposes.

SURA Mexico, the $60 billion Mexican pension fund for 8 million beneficiaries, began investing in private equity in 2019 when it launched a multi-year capital commitment programme. Today, the fund, which is forecast to double in assets under management by 2031, sits on 20 LPAC committees in coveted relationships that will stretch beyond the current cycle with the likes of KKR and CVC Capital Partners.

“From what we hear from our GPs, Mexico and the Middle East are currently the two most dynamic fundraising environments. That will change, but we are determined to take advantage of this window,” says CIO Andres Moreno in an interview from the fund’s Mexico City offices.

New private equity investors like SURA Mexico have been able to muscle in on prized GP relationships because the lack of exits has meant many long-standing LPs have been unable to reup in new vintages. But SURA Mexico has also earned its place at the top table. It boasts its own scale (growing at 20 per cent per annum) and also brings its connection with pension funds under the wider group, Afore SURA, which oversees funds in countries like Colombia and Chile together manage $180 billion in assets under management.

Unlike some new defined contribution pension funds like the UK’s NEST, SURA Mexico pays private equity performance fees.

But Moreno, CIO since 2018, has still negotiated low enough fees to offer beneficiaries – only charged 57 basis points – the chance to invest in mega cap buyout funds, venture, growth and secondaries, opening the door to strategies that would normally be out of reach for Mexican savers, some of whom only have pension pots of $5,000.

Recently, the portfolio was expanded to include private credit for those closer to retiring.

“We have negotiated cheaper fees than standard 2:20 and co-investment opportunities with no fee-bearing capital commitments. Some people in Mexico have accounts of just $5,000 and would never normally be able to invest with the KKRs of this world. We have the ability to access some of the best investment strategies for them at very competitive costs.”

The private equity strategy is only one example of SURA Mexico’s growing confidence. Something it shares with the country’s $350 billion pension industry which now accounts for around 20 per cent of Mexico’s GDP. Moreno believes it is rooted in the sector’s success in driving reforms that have reshaped the system. Like successfully lobbying the government to enable pension funds to invest in private assets, where SURA Mexico now puts around 20 per cent of its AUM. Or pushing for the ability to invest more in equity in 2018 in a reform that opened the door to active management for the first time. Policy makers also ruled out beneficiaries withdrawing money from their pension funds during the pandemic which has depleted pension funds in Peru and South Africa.

“We have changed the pension fund industry by pushing for increased contributions and proposing changes that have opened up the investment regime. Policy makers are constrained by their political mandates, but they do hear us,” he says.

pressing pause on infrastructure

Today, Moreno’s focus is on persuading the government to do more to support investment in local infrastructure. It’s an asset class he wants to invest more but has just pressed pause, blaming growing uncertainty in the contractual agreements between the government and investors.

The risk of the government reneging on tariffs linked to, say, utility or road investments which guarantee returns has spiked, changing the economics of projects. A cohort of lawyers sits in SURA Mexico’s investment team, overseeing contractual agreements between the government and the fund, but judicial reform in Mexico whereby voters now elect all judges suggests more contractual uncertainty ahead.

“The political situation and judicial reform is creating volatility and things are starting to get shaky in Mexico. We are very focused on the risks in long term investment, especially in local infrastructure, because these investments involve reaching an agreement with the government.”

It’s a source of frustration because infrastructure investment is a good way to showcase how pension fund investment can change an economy. Especially in a culture where a cohort of people still view paying into a pension as a form of tax and “don’t think the money belongs to them.”

“We are mindful of our social role in the economy. The only way we can be sustainable is if we are relevant to our 8 million clients. Every time we deploy one dollar, we have to work on the development of our markets.”

High growth asset allocation

Assets are divided between ten different strategies with different glide paths according to beneficiaries’ age and risk appetite. The public equity allocation in the different funds ranges from 15-60 per cent, averaging at around 40 per cent.

SURA Mexico invests passively in US equity, but in Europe and Asia, where he believes it’s easier to tap alpha, the fund has mandated active strategies to external managers benchmarked against a local index. “We want to do it smartly, but we are not placed to make decisions in far flung markets,” she says.

These manager relationships have also brought important knowledge transfer opportunities. Teams from Mexico travel to managers in developed markets to shadow investment teams and glean experience. “We have negotiated robust knowledge transfer agreements via secondments where we learn to do things better. It’s helping us develop our domestic market.”

The 75-person investment team run an increasingly sophisticated tech platform that spans BlackRock’s Alladin and other private market suits. “We’ve invested a lot to expand our competence,” he says. Outside private markets, the team marks to market the portfolio on a daily basis so the net asset value is reported daily. “We don’t have any off balance creative structures.”

He is confident Mexico can ride out the impact of US tariffs, as long as policymakers get it right.

“If rates are sky high and there is a fiscal contraction, then it will be hard for the peso to absorb shocks. Shocks will be absorbed by real variables instead, and we will end up with a recession. It really does depend on the policy reaction.”

And he notes that although the “Mexican factor” is deterring investment in infrastructure, that risk pays off handsomely in other areas. Listed Mexican corporates, for example, trade at a discount but derive most of their income from the US.

“You get the revenue certainty but with Mexican multiples. That is the sweet spot.”

Overseeing Mercer’s $600 billion outsourced CIO (OCIO) business, the consulting giant’s Dublin-based global chief investment officer Hooman Kaveh is used to keeping his finger on the pulse of needs and concerns from clients, which include pension plans, endowments and not-for-profit organisations. And having spent the last week visiting Hong Kong and Singapore, unsurprisingly there was only one thing everyone wanted to talk about.

“If you asked me this question [about clients’ biggest concern] three months ago, I would have had a number of answers,” Kaveh tells Top1000funds.com on the sideline of Mercer’s investment conference in Singapore.

“Today, everybody’s talking about tariffs – that’s all they want to talk about. What are the implications of tariffs on the global economy? Is there going to be a recession? And what do I do with our portfolio?”

A re-evaluation of the role of US assets in portfolios among global capital allocators is already underway, with Canadian pension funds including CPPIB reportedly halting some private markets allocation to the US due to geopolitical and tax worries.

For decades, US government bonds have been accepted as the safe haven asset and the US dollar as the reserve currency, but as these assumptions become challenged by the tariffs Kaveh says there is a “crisis of confidence” in the world’s largest capital market.

“One of the first questions [we get at client meetings now] is should we reduce our exposure to US assets or diversify more? And in general, we would say yes,” Kaveh says.

This could be diversifying the currency base of the portfolio by considering allocations to euro or yen assets and gold, but the approach has some regional caveats. For example, a Hong Kong investor may not want to significantly reduce its US dollar exposure, as it is already its lowest risk currency position because the Hong Kong dollar is pegged to the US dollar, Kaveh says.

But more importantly, he says now is the time to pivot back to active management in equities. Mercer is recommending its clients with large exposure to passive strategies, and consequently a large footprint in the US market, to consider active strategies in other developed markets like Europe or Japan or emerging markets due to attractive valuations.

“The expectations from them are much lower in terms of earnings growth,” Kaveh says. “But with the help of an active manager, they can identify which companies in Japan, Europe or in emerging markets are less vulnerable to tariffs and global trade and are more focused on delivering local services and goods, particularly in the mid cap or smaller companies.”

How private markets changed the game

Kaveh joined Mercer in 2006 as Euoprean CIO advising on asset allocation and manager structure for primarily UK and Irish pension funds. During his close to two-decade career at the company, Kaveh went from overseeing a dozen investment professionals and $20 billion assets under managements to leading a 100-person team and one of the biggest OCIO service providers in the world.

As asset owners become more mature in the way they invest, Kaveh says the biggest change he saw is allocators’ view towards alternatives, namely hedge funds and private assets. Up until 2010, most of Mercer’s institutional clients still had a typical 60/40 portfolio but now there is much more diversification both in asset classes and manager selection.

Private debt was the standout asset class in recent memory as its nominal return shifted upwards with interest rate increases, and the lack of deep recession in the last 15 years means no mass-scale defaults in the economy, he says.

A survey conducted by Top1000funds.com and Casey Quirk in February found that asset owners are enthusiastic about private assets alternatives, and 37 per cent of CIOs polled said they are planning to increase allocation in the next 12 months. Most of Mercer’s clients, particularly mid-sized assets owners, are still under allocated in private markets, Kaveh says.

In some less established alternatives asset class, he sees some potential challenge in the asset management industry’s ability to meet the increasing allocation demand.

“In the very short term, you could argue that with private credit, for example… because it’s a new asset class, there may not be as many funds and managers available as something more established like private equity or real estate,” he says.

“There may well be more money trying to get invested as soon as possible, with not as much capacity in the industry.

“[But] the capacity is coming all the time, so I’m not particularly concerned.”

Manager selection is critical to success in private markets. Whereas the spread of performance between best and worst performing managers could be 2 to 3 per cent in public markets, Kaveh estimates the difference between best and worst performing fund in private markets can be as much as 20 to 30 per cent. The dispersion is especially evident in private equity and venture capital.

Mercer has a dedicated manager research team and has a four-factor scoring system. This consists of evaluations of a manager’s abilities around ideas generation (having genuinely unique, value-add investment ideas); portfolio construction (translating the investment ideas into appropriate portfolios without adding unintended risks); implementation (making sure the ideas are properly executed); and business management (having sound management of the investment process).

But in times of extreme volatility, Kaveh says asset owners will increasingly demand one thing from their managers – transparency.

“People want to know exactly how the portfolios are positioned, so we do a lot of scenario analysis with the manager’s portfolio so that we can show the asset owners [of possible results following macro events],” he says.

DAA capability shines

Aside from strategic asset allocation, Mercer also make decisions on behalf of its clients to capitalise on short-term opportunities via its macroeconomic and dynamic asset allocation team. Kaveh says the unit works on a 12-to-18-month horizon and aims to benefit from “turning points” in the market.

One recent example of such turning points occurred just after the US election. Expectations that the Trump administration will introduce pro-business policies, cut taxes and reduce regulations fuelled a stock market rally in the fourth quarter of 2024 and into early 2025.

However, Kaveh says the DAA team was conscious of comments Trump made on the campaign trail about introducing tariffs to ensure US’ economic partners trade with it fairly and was critical of whether the perceived business benefits will come through immediately.

In the fourth quarter of 2024, the team had an underweight position in equities and overweight in bonds – especially in what Mercer calls “growth fixed income”, which are assets that are typically below investment grade, less liquid in nature and more complex than traditional fixed income.

“The markets went up a little bit more in January, February, but then they fell back down again, and that [underweighting in equities] has been value adding,” Kaveh says. “The flip side of that was to invest the money instead in Asian high yield bonds, and also in frontier markets.”

Frontier markets such as African countries may be basic commodity producers and less developed than emerging markets, but they are also not as ingrained in the global supply chain, he says.

“Those frontier markets are offering higher yield, often double-digit yield, on the investments with sort of a focus on their own positioning. So if they’re a strong economy that is not overspending in their budgets, then they can be a good investment opportunity.

“We typically tell clients that our DAA service can add about 25 basis points per annum over the over a five-year time horizon. In actual fact, it’s added about 50 basis points per annum over the last 5 to 10 years.”

Asset owners may want to review their decision-making and governance structure to ensure that they are able to seize the opportunities when they come, Kaveh adds.

“It’s very difficult to make decisions in the heat of the moment, so be ready to make your decisions in advance.”

I accept that using the above title to talk about the circular economy is groan-worthy, but hopefully I have captured at least a segment (part of a circle!) of your attention.

The Thinking Ahead Institute recently hosted a working group to discuss whether a circular economy was a possible – or even a necessary – component of the climate transition. The wider context we are exploring is whether a climate transition that only considers mitigation would be doomed to fail. Are we only likely to succeed in a climate transition if it simultaneously solves for biodiversity loss, social justice, materials use (circularity) and adaptation?

Within this context, the circular economy thesis goes as follows: the current linear economy is the source of the problems we are trying to address (for example, biodiversity loss, social inequality, climate change), and therefore needs to be reformed. The circular economy is one route to reform.

What is a circular economy?

A circular economy is one which keeps materials circulating within the economy in their highest value use. So, for example, we embrace the idea of the 100-year washing machine, where locally-3D-printed parts keep the machine working and out of landfill. Throughput through the economy is thereby reduced and, ideally, there would be zero waste heading to landfill. So after 100 years, our well-used washing machine would be carefully disassembled. Some parts, like screws or bolts, might be reused as they are (‘retain their highest value use’) while others, like the case and drum would require energy to melt them into a form that could be used again.

From this simple idea (highest-value use for as long as possible) flow a number of implications. One of these runs counter to our current prevailing culture – namely, that this would be a ‘needs-based’ economy rather than a ‘wants-based’ economy. To explain, there would be no place for the fast fashion industry. While we may want disposable clothing, what we need is durable clothing. By extension we can also eliminate the advertising industry, which exists to stimulate wants. As our needs will always be smaller than our wants this is a mechanism for reducing consumption.

As some industries disappear, others would shrink, such as mining (less need for new input). In addition, a circular economy appears to more naturally favour localisation (transportation is a form of waste), and to be accommodating of changed ownership models (smaller, employee-owned businesses; more B-corporations).

A circular economy therefore offers some highly desirable benefits. In requiring less mining and, in seeking to eliminate waste, it would be kinder to our remaining biodiversity. In lowering consumption and changing ownership models it would promote greater social justice. The lowering of economic activity would also mean we need less energy, which would – in a non-linear way – accelerate de-carbonisation.

If we grow our demand for energy, then growing renewables doesn’t really drive out fossil energy, it just tops it up. However, if we shrink our energy demand, then growing (cheaper) renewables increasingly drives out (expensive) fossil energy. In turn, this positive dynamic would reduce the ultimate cost of adaptation (relative to the amount of adaptation we will have to do if continuing to run a linear economy).
Against all these highly desirable benefits it seems a little churlish to point out one small problem with the circular economy – there probably isn’t as much money to be made.

If we imagine a spectrum with a linear economy (100 per cent) on the left and a circular economy (100 per cent) on the right, then we can make some statements about these end points. If we are 100 per cent linear then we can state that waste is either free or very cheap.

If this were not the case, then we would be at some other point on the spectrum. We can therefore say that 100 per cent linear offers the maximal opportunity to externalise cost and, therefore, is likely to offer the maximum possible investment returns.

Conversely, if we are on the right (100 per cent circular) then we can say there is minimal opportunity to externalise cost precisely because waste is eliminated at this point on the spectrum. We can’t say much about returns other than they are not maximised (100 per cent linear has taken that crown) – but there is an economy, so presumably the returns are positive.

One interesting observation voiced in the working group was that maybe required returns are lower in a 100 per cent circular economy. If externalities are minimised from the economic system, then their costs don’t fall on private individuals, as they do under the 100 per cent linear system.

What practitioners think

The working group discussion of the thesis was supplemented by polling questions. There was unanimous agreement to the following three ideas:

In the long run, high extraction rates relative to carrying capacity are likely to lead to undesirable (societal and environmental) outcomes.
A successful climate transition that also addresses biodiversity and inequality requires capitalism to be reformed.
The circular economy is a promising solution for the combined problem of biodiversity loss, inequality and climate change.

We can therefore conclude that there is strong practitioner support for the ‘theory’ of the circular economy. In terms of the ‘practice’ the working group described the current global economy as 92 per cent linear (on the spectrum discussed above), with an expectation that in 10-years’ time it would be 75 per cent linear.

Arguably this anticipated shift will be too little and/or too slow, as the group believe that sustainability will require an economy that is 11 per cent linear and 89 per cent circular. The big obstacle, for investment organisations, is the definition of fiduciary duty. Polling suggested that there would need to be a significant change to the definition to enable a shift to a circular economy – but subsequent discussion modified this somewhat.

It is possible that the definition doesn’t need to change at all, but all investment organisations would need to move together to make it happen without individual risk. There was clear agreement that a circular economy is more compatible with sustainability than a linear economy, and that it would be good for society, but likely bad for investment returns in aggregate. It will be challenging to implement due to regulatory, infrastructure, and political constraints.

For all these reasons, the group thought it unlikely to happen at scale. These conclusions were not lightly arrived at.

Rarely have I been in such a thoughtful and introspective conversation with industry peers. I suspect that we will need to go round (sorry!) this conversation a few more times.

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.

Nordic pension giant the Swedish Fund Selection Agency (FTN) is on the hunt for active Swedish and European small cap equity managers in a SEK 46 billion ($4.6 billion) tender.

The government agency is planning to select 10 Swedish and four European small cap funds, in a move that will affect 334,000 premium pension savers.

“Investing in smaller companies generally involves higher risk but has also yielded high returns in the long term. FTN deems that these two categories are suitable for the premium pension fund platform and that they contribute to the freedom of choice for savers,” the agency’s executive director Erik Fransson said in a statement.

The premium pension, which the FTN procures funds and managers for, is part of the Swedish state pension and is a defined contribution system which receive 2.5 per cent of workers’ pensionable income every year.

Members of the system can choose the level of risk and strategies for their savings. AP7 Såfa is the default government option for those who do not make a choice.

The premium pension is in net inflow and its assets are expected to grow to €400 billion ($451 billion) by 2040. The FTN will procure funds worth SEK1.1 trillion ($112 billion) between 2024 and 2027.

Last time the agency sought out small cap strategies was in actively managed Nordic equities and it awarded four managers with a collective mandate worth SEK 8.8 billion ($902 million) this February.

More asset owners are revisiting small cap strategies as a useful diversification from US mega cap equities and active managers are essential for identifying companies with sound fundamentals.

The agency is also currently reviewing applications for two tenders in actively managed and passively managed Swedish mid/large cap equities, worth SEK 100 billion ($10 billion), and one for actively managed global mid/large cap equities worth SEK 200 billion ($20 billion).

The next fund category to be procured is IT and communication sector equity funds, which covers SEK 124 billion ($13 billion) as of 31 March 2025. Notices of procurement are expected in late August or September.

There has been a concerted effort to lift the quality of funds and reduce fees on the premium pension platform. As Fransson told Top1000funds.com in an interview last year the number of funds on offer has reduced from 900 to 450. Remaining funds are re-tendered to access the ability of best-in-class managers.

Meanwhile, managers themselves also have to pay a tender fee and if they are successful, a platform fee based on assets under management. The FTN was hopeful that it is an effective measure to deter managers without a good chance of success from going through the lengthy RFP process.

The premium pension platform does not offer access to private markets.

Applications for the Swedish and European small cap strategies need to be submitted before June 16, 2025.