The Swedish buffer fund AP4’s high allocation to equities has meant its record annual return in 2019 has come tumbling down to a first half result of -2.5 per cent. But its very low cost and nimble nature positions it well for the future.

With a team of only 60 people, one of the advantages of the SEK403.2 billion ($46 billion) AP4 is its ability to be agile in both how it allocates assets and how it makes decisions.

“One of our strengths is we are a small organisation,” says chief executive Niklas Ekvall. “We can be nimble if needed because of the small size of the organisation and the close interaction with the board which has delegated responsibilities throughout the organisation.”

An example of this is the fund’s quick reaction to the market volatility in March and April where it moved its asset management team to what it calls a state of readiness, or “beredskapstillstånd”, which allows it to meet more frequently than normal and create more flexibility to share information about the fund’s larger positions and act swiftly on opportunities.

“We changed the way we work to be more integrated and meet more frequently to make sure we are sharing all the information among the team and have a good grip on all the big positions, as well as be able to act quickly if opportunities arise,” Ekvall said.

Continuous risk management is a hallmark of the fund’s state of readiness, and there are four main principles that the team focused on during the spring volatility:

  • Avoid forced trades in non-functioning markets – only trade when it is necessary and underpinned by an investment analysis
  • Dare to be long-term – hold and even increase long-term positions and act as a long-term and responsible owner
  • Strive to take the offensive – seek out and take advantage of opportunities and imbalances that emerge in the market
  • Support each other – stay positive and calm.

“In this different mode of running the fund we try to avoid doing unnecessary transactions because it’s very expensive to transact,” Ekvall says. “We only transact when necessary. We run the fund in a much more tight way during this period.”

Among its peer group globally AP4 is one of most cost efficient pension funds and has a very low overall cost structure of only 0.1 per cent of fund capital – made up of operating expenses of 0.06 per cent and commissions (to external providers) of 0.04 per cent.

Its low cost is due to the simplicity in the portfolio construction and the high allocation of assets to internal management.

“Cost efficiency comes from managing quite a lot internally and keeping things quite simple, so we don’t end up with a large number of external mandates that can be costly,” Ekvall says. “Sometimes you end up getting a high cost index portfolio if you diversify too much, [but] our mandates are large enough to make a difference.”

About 85 per cent of the fund is managed internally and active returns have largely come from the internal management of domestic equities.

“If there are asset classes that we believe can contribute strongly to the total portfolio but we don’t have internal competence then we hire external managers,” Ekvall says, pointing to emerging markets, private equity and hedge funds which all have external mandates.

“We are very selective in doing that. There are some areas we believe there is a strong benefit to adding it to the portfolio and there is active return potential then we will add it. Sometimes we want to have a relationship with a manager so they can contribute to the organisation more broadly.”

Ekvall describes the fund as a very active manager, with an expected active return above the benchmark of 1 per cent a year.

Since the start of the pension system in 2001, AP4’s average annual return after costs has been 6.5 per cent in nominal terms, which is higher than the long-term target of an average of 5.7 per cent per year (real return target indexed by inflation).

In looking for investment opportunities the team looks over three different time horizons: a short-term tactical view, a three to five-year horizon and the long-term, 40-year view which is where it builds it asset-liability management framework. This occurs every three years and the fund is in the middle of that process now.

“We have our base asset allocation and work with our mandates to generate extra return. We think the best opportunities are not in the tactical space but in the three to five year time horizon. But the long-term view and the ability to carry risk over the long term gives us possibilities,” Ekvall says. “In spring we were early to buy equities when the market was falling, and there is more opportunity in credit. We could buy credit at very good prices due to our ability to carry risk and be one of the few buyers. We try to be on our toes and see where the imbalances in supply and demand which is usually in the three to five year horizon. It is a very strong benefit that we are so long term in our thinking, we can act in a way few others can do.”

Over the past three years the fund has been working actively to increase the real asset portfolio, trying to find assets that will yield stable long-term real return to get more inflation protection in the portfolio and compensate for bad returns in nominal bonds, which haven’t played same role as they have in the past.

When the fund conducted the last ALM study in 2017 the conversation centred around the idea that equities would not generate the same returns they had for the previous decade. Ekvall says he still believes an equities portfolio would deliver better outcomes than fixed income but according to the fund’s main scenario it will be 2023 before GDP levels return to the same level as pre-pandemic.

“The long-term key question is whether the pandemic will cause structural and permanent damage to the world economy, and if so, how much. Revolving around this question, undoubtedly there is no lack of areas of concern, including the risk for permanently high unemployment, a new crisis in the financial system, a halt to globalisation and increased regional tensions, and a sharply higher level of debt that may lead to structural problems in the future,” he says. “On the other side of the scale, and more positively, are other factors that over time may strengthen the economy’s way of functioning and productivity. Examples of such factors are an acceleration of digitalisation, investments in neglected infrastructure, the shift to a sustainable society, and the potential for positive structural reforms.”

Ekvall acknowledges that the pandemic will lead to permanent damage to the world economy, but believes that this damage will not necessarily be as hard to repair over the long term as after the financial crisis.

 

AP4’s long term asset allocation

Global equities 39.6%
Swedish equities 15.3%
Global fixed income 24%
Real assets 13.1%

 

 

Speaker

Professional mad scientist. Co-founder and executive chair, Socos Labs.

Theoretical neuroscientist, entrepreneur, author, and mother of two, Dr. Vivienne Ming is featured frequently for her research and inventions in The Financial Times, The Atlantic, Quartz Magazine and the New York Times. Co-founded with wife Dr. Norma Ming, Socos Labs is a science incubator dedicated to solving some of the world's most pressing problems.

Previously, Vivienne has pursued her research in cognitive neuroprosthetics as a visiting scholar at UC Berkeley's Redwood Centre for Theoretical Neuroscience. In her free time, Vivienne works to design AI systems to help treat her son’s diabetes, predict manic episodes in bipolar sufferers and reunite orphan refugees with extended family members. She sits on the boards of numerous companies and non-profit organisations.
For relaxation, Vivienne frequents the sci-fi section of Audible and spends time with her wife and children.

Moderator

Tate has been an investment industry media publisher and conference producer since 1996. In his media career, Tate has launched and overseen dozens of print and electronic publications. He is the chief executive and major shareholder of Conexus Financial, which was formed in 2005, and is headquartered in Sydney, Australia.
The company stages more than 20 conferences and events each year –
in cities which have included London, New York, San Francisco, Los Angeles, Amsterdam, Beijing, Sydney and Melbourne – and publishes three media brands, including the global website and strategy newsletter for global institutional investors conexust1f.flywheelstaging.com. One of the company’s signature events is the bi-annual Fiduciary Investors Symposium. Conexus Financial’s events aim to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. Tate served for seven years on the board of Australia’s most high profile homeless charity, The Wayside Chapel; and he has underwritten the welfare of 60,000 people in 28 villages throughout Uganda via The Hunger Project.

Speaker

Kerry Kennedy is President of Robert F. Kennedy Human Rights. She is the proud mother of three daughters, Cara, Mariah, and Michaela. A human rights activist and lawyer, she authored New York Times best seller Being Catholic Now, as well as Speak Truth to Power and Robert F. Kennedy: Ripples of Hope.

The seventh of Ethel and Robert F. Kennedy’s eleven children, Kerry has devoted more than 40 years to the pursuit of equal justice, the promotion and protection of basic rights and the preservation of the rule of law. She works on a range of issues, including child labour, women’s rights, disappearances, indigenous land rights, judicial independence, freedom of expression, ethnic violence, criminal justice reform, immigration, impunity and environmental justice.
Kerry served as Chair of the Amnesty International USA Leadership Council for over a decade. She serves on the board of directors of the United States Institute of Peace, Human Rights First, Kailash Satyarthi Children’s Foundation, Laureate and Leaders, Nizami Ganjavi International Center, HealthEVillages, as well as RFK Human Rights’ numerous international chapters. She is on the Advisory Committee for the Association of American Indian Affairs, the Albert Schweitzer Institute, Sankofa, San Patrignano, and the Centre for Victims of Torture.
Kerry has received high honours from President Lech Walesa of Poland for aiding the Solidarity movement, The Humanitarian award from the Congress of Nobel Peace Prize Laureates, and many other honours.
A member of the Massachusetts and District of Columbia bars, she is a graduate of Brown University and Boston College Law School. She holds honorary doctorates of law from Le Moyne College, University of San Francisco Law School, and University of New Caledonia, and honorary doctorates of Humane Letters from Bay Path College and the Albany College of Pharmacy.

Moderator

Tate has been an investment industry media publisher and conference producer since 1996. In his media career, Tate has launched and overseen dozens of print and electronic publications. He is the chief executive and major shareholder of Conexus Financial, which was formed in 2005, and is headquartered in Sydney, Australia.
The company stages more than 20 conferences and events each year –
in cities which have included London, New York, San Francisco, Los Angeles, Amsterdam, Beijing, Sydney and Melbourne – and publishes three media brands, including the global website and strategy newsletter for global institutional investors conexust1f.flywheelstaging.com. One of the company’s signature events is the bi-annual Fiduciary Investors Symposium. Conexus Financial’s events aim to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. Tate served for seven years on the board of Australia’s most high profile homeless charity, The Wayside Chapel; and he has underwritten the welfare of 60,000 people in 28 villages throughout Uganda via The Hunger Project.

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The European Union’s rescue plan will give a huge boost to an already thriving market for green bonds and other instruments that promote sustainability. But investors need to be wary: green comes in many shades.

Click here to view the full article

The death of capitalism – overcoming deepening inequality

How can investors work together to combat inequality?
In this podcast episode Amanda White speaks to the president of CalPERS, Henry Jones, about his own experience and the fund’s journey in tackling diversity and inclusion, in particular issues of racism.

It explores the role of the investment community in standing up and working together to shape a future which is just, equal, inclusive and deeply grounded in fundamental human and civil rights.
It discusses how CalPERS, the largest pension fund in the United States, is tackling these issues internally and through its investment allocations, but also how the industry can collectively change the status quo processes and behaviours around systemic inequality.

About Henry Jones
Henry Jones is serving his fourth term on the CalPERS Board of Administration and his second one-year term as president. Prior to being elected president, he served three years as vice president of the board.
He retired in 1998 from the Los Angeles Unified School District (LAUSD) — the second largest in the nation. As chief financial officer, he oversaw LAUSD’s $7 billion annual budget. He also headed their Annuity Reserve Fund Board overseeing the pension fund for 7,000 schoolteachers and administrators.
Jones currently serves as a personnel commissioner for the Los Angeles Community College District. He is a member of the governing board of the Robert Toigo Foundation, a nonprofit organization that encourages minorities and women to pursue careers in finance. He also serves on the board of the Pacific Pension & Investment Institute, an educational organization that assists pension funds, corporations, financial institutions, and endowments worldwide with their fiduciary responsibilities, particularly in Asia and the Pacific region. Previously, he represented CalPERS on the Advisory Council of California All, a nonprofit organization focused on closing the achievement gap from preschool to professional careers in law, financial services, and technology.
He has served on the board of directors for Community Partners, a nonprofit organization that works with social entrepreneurs, grant makers, and civic leaders to design solutions, foster, launch, and sustain initiatives for change.
In addition, he was the state finance chair for the Association of California Schools Administrators; treasurer for the National Council of Institutional Investors; chairman of the Los Angeles Schools Federal Credit Union; business development executive for IBM Business Consulting Services; and principal consultant for PricewaterhouseCoopers. ones also served as an adjunct professor at California State University, Los Angeles. He has a bachelor’s degree in business administration and finance from California State University, Los Angeles.

 

About Amanda White
Amanda White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of Top1000funds.com, she is responsible for directing the global bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts.  She holds a Bachelor of Economics and a Masters of Art in Journalism and has been an investment journalist for more than 25 years. She is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

 

Sustainability in a time of crisis is a Top1000funds.com podcast collaboration with PRI, with support from Robeco
Sustainability issues have never been more important than they are right now. How can investors work together to use this unprecedented opportunity to put the promise of purpose-driven leadership and stakeholder capitalism into practice? This collaborative work with the PRI, with the support of Robeco, will showcase leadership in sustainability during a time of crisis.

More than 70 investors have collaborated to produce a framework for an investment strategy led approach to decarbonising portfolios and maximising efforts to achieve net zero emissions globally by 2050.

The “Net Zero Investment Framework” developed through the Institutional Investors Group on Climate Change (IIGCC) has been released for consultation and provides a comprehensive set of recommended actions, metrics and methodologies, which aims to enable asset owners and asset managers to effectively become ‘net zero investors’.

“The willingness is there, but until now the investment sector has lacked a framework enabling it to deliver on this ambition. As we work towards investors adopting the framework before the end of the year, the race is now on in the run up to COP26 for asset owners and managers to show they will be net zero investors,” says Stephanie Pfeifer, chief executive of the IIGCC.

The framework seeks to ensure investors can decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with a 1.5°C net zero emissions future.

It’s an investment strategy led approach, supported by concrete targets set at portfolio and asset level – combined with smart capital allocation, and engagement and advocacy activity – ensure investors can maximise their impact in driving real-world decarbonisation. Four different asset classes – sovereign bonds, listed equities and corporate fixed income and real estate – are covered by the framework, with others to follow.
Among the investors collaborating on the project are the giant Dutch pension provider, APG, which is one of five investors putting the framework to the test, by modelling its impact across performance of their real-word portfolios. The others are Brunel, the Church of England Pensions Board, PKA and Phoenix Group.

APG’s managing director global responsible investment and governance, Claudia Kruse, says: “In order for us to be able to implement ABP’s net zero carbon ambition and for the industry as a whole to play its role in delivering the Paris agreement, we need to establish the Net Zero Investment Framework as a global industry standard.”

The framework is intended to be adopted and implemented by investors following its finalisation. It incorporates definitions used in the EU Taxonomy, which was formally adopted by the European Parliament in June. More than 25 methodologies and tools, to support alignment with the Paris Agreement and net zero emissions, have also been analysed and reviewed in its formulation, with those considered best fit approaches included in the framework.
Five core components help define a ‘net zero investment strategy’ as set out in the framework, covering: objectives and targets, strategic asset allocation and asset class alignment, alongside policy advocacy, investor engagement activity and governance.

 

Claudia Kruse is one of the speakers at the Top1000funds.com Sustainability conference from September 8-9. For more information click here.