Raquel Pichardo-Allison talks to Johan Magnusson, managing director of AP1, about how the scheme is adapting to the changing economic climate
As Johan Magnusson celebrates his one year anniversary as managing director of Swedish pension buffer fund AP1, he can look at a scheme that has fundamentally changed the way it manages money.
In response to weak returns, the fund earlier this year revamped its management structure in an attempt to increase the focus on strategic asset allocation. Officials will now focus less on stock picking and equity research and more on the overall risk levels of the portfolio. Officials at the fund will become more opportunistic in reallocating assets and have decreased the amount of active management within the fund.
And in a bid to cut costs, some 20 employees were made redundant.
Magnusson believes the changes will move AP1 – currently the third best performer among the four largest buffer funds – up the ranks.
Raquel Pichardo-Allison: Coming into AP1, what were some of the biggest challenges you thought you’d face?
Johan Magnusson: How to enhance allocation – the strategic asset allocation of the fund was the most important part.
Raquel Pichardo-Allison: What was the strategy behind the changes to the fund?
Johan Magnusson: The changes have been on the basis that we have for many years focused on active management. However, the four AP funds compete, and we must conclude that we are number three. Something else is not working. It’s easy to understand that it is in our strategic allocation where we need to perform better. We did a job understanding how to do that and in that process we realised it would be difficult to have both the focus on active management and strategic asset allocation. So we came to a point where we had to decide to focus on one thing and it was easy to decide that it should be strategic allocation.
We can continue with active management, but not to the same extent anymore.
Raquel Pichardo-Allison: What will the new breakdown be between active and passive management in the portfolio?
Johan Magnusson: We do have a high degree of active management to start with. I think we are going to include more passive or enhanced, but not a dramatic change. We don’t have (an exact) target.
Raquel Pichardo-Allison: You mentioned that you previously took a bottom-up approach to managing the fund. Now you’re looking at more of a top down.
Johan Magnusson: We looked at the portfolio top-down before. Of course we did. But we used our resources more (on bottom-up). Let me use an example. Our financial analyst was very good at picking the right banking stocks depending on news about the politics or capitalisation issues and others. But the most important thing is, should we have an index weighting in banks or not? We didn’t ask that question. Should we have banks all together? We were pretty good at jumping in between the banks and creating alpha. But the important thing is should we own banks in this environment? We want to use more resources in asking that type of question. We want this financial analyst to be more involved in the issue of whether we have the right weighting to banks in the first place.
We need to use some of the resources we had used for bottom up on more top down issues.
Raquel Pichardo-Allison: What does this mean for the way that you evaluate risk within the portfolio?
Johan Magnusson: We will evaluate risk more on a total portfolio level. One example could be, if you have independent investment teams, the way we would look at interest rate risks would be evaluated and decided between maybe a dozen different people.
Where as with a more holistic approach to risk and to portfolio management, we can say, “Maybe in the not too distant future we will likely see interest rates go up. How do we manage that in the portfolio?”
Maybe we will just not focus on the bond side, maybe on interest-dependent stock in the equity portfolio. So the ambition is to have a more holistic approach to the portfolio in terms of how we asses risk and how we want to deal with that.
Raquel Pichardo-Allison: Do you have an overall risk target?
Johan Magnusson: We currently have a portfolio tracking error of about 0.8 in the total portfolio. We have a mandate which is much bigger. I think that 0.8 is too low. We had a risk budget under the old management style for different teams, but now we’re using that for the whole portfolio.
The optimal level depends on where you start from. But the ambition for us is to be more active in allocation and that’s more important than exactly how the tracking error develops.
Raquel Pichardo-Allison: Some of your portfolios and teams have been merged. What will the new structure look like?
Johan Magnusson: Let’s start outside. 40% is managed externally. We have 23 mandates. It’s probably going to be fewer mandates, more tilted towards indexing. But also we’ve been building commitments and capacity in alternatives.
Internally, I don’t see a big difference between portfolios. We will still have a big Swedish portfolio, we will still have a big European portfolio, fixed income, we gradually through the year expanding credit, but I don’t see big differences between portfolios.
Raquel Pichardo-Allison: Where do you see your alternatives portfolio going?
Johan Magnusson: We have a private equity program which is 1.1% invested. That’s going to grow. The target for private equity is 4%. We have real estate, which is just below 5%. That’s going to grow. The target there is 8%. Those are areas where we have been active. We have a small portfolio of activist funds (with a hedge fund structure).
But we have other areas where we want to take opportunities. We have a mandate for opportunistic investments – opportunistic in terms of where and how we invest. Investments could be leveraged loans, bank loans, but it could be other things.
Raquel Pichardo-Allison: The AP funds have very specific investment guidelines. What are your views on whether or not those mandates need to be changed?
Johan Magnusson: We do our own ALM (asset liability modelling) study of the system. The investment guidelines are old and they need to be looked at once again. We can’t do commodities. We need to have 95% of assets in listed assets. We need to have at least 30% in secure bonds, where as our ALM studies point to the fact that we should have more than 70% equities since the AP funds are buffer funds representing only a small part (10%) of the assets in the pension system.
So I think the guidelines are old fashioned and need to be updated.
Raquel Pichardo-Allison: Assuming there were no restrictions, what would the asset allocation look like?
Johan Magnusson: Our ALM study indicates we should have more real assets than we are allowed. But since we have guidelines, we haven’t looked into the exact structure. We’ve had this discussion (with the Department of Finance) but this isn’t new. This discussion has been going on for a number of years.
Raquel Pichardo-Allison: There has been discussion about potentially merging four AP systems. What are your views on whether or not they should be merged?
Johan Magnusson: I understand that there is a debate on efficiency. The design was for competition and diversity but it resulted in higher costs than having one or two funds.
The funds are pretty similar. Returns are pretty similar. Of course they have to ask whether that is efficient or not. You have to look both at investment guidelines and the structure.
Raquel Pichardo-Allison: What are some of the biggest challenges Swedish pension funds are facing in trying to get out of this financial crisis?
Johan Magnusson: For us managing the pension money, it’s (that)... we’ve had now such a long period where you have not been paid for taking risk in the equity market. You have to ask yourself, are equities going to outperform bonds? How do you allocate your portfolio?
But we can look long term, we can buy more equities. I’m not sure this is the right time to do it but maybe soon.
Raquel Pichardo-Allison: What makes the Swedish pension funds unique in how they are positioned to come out of this crisis?
Johan Magnusson: One benefit is that we are long term. We have a long term valuation period. I believe we have the trust from our owners, so to say, so we don’t have to panic. We can take opportunities in the market and we don’t really need to change our management style. We can use our resources more efficiently.
Raquel Pichardo-Allison: Looking ahead five years from now, what kind of fund would you see?
Johan Magnusson: Five years from now we will act more like investors than asset managers. It’s more focused on the long term than on the short term. We will be much bigger, because we’re succeeding in the markets. We will still have a high equity share within the markets but our share of alternatives is clearly higher than today. Hopefully we will remain one of four AP funds.
Some of the UK's biggest pension schemes will be forced to report on climate risk in line with recommendations from the Taskforce for Climate-related Financial Disclosures (TCFD).
TPT Retirement Solutions has launched a pension scheme for the education sector which offers schools both defined contribution (DC) and defined benefit (DB) pension provision.
The People's Pension has revealed plans to overhaul its charging structure, cutting fees and returning profits to members with an aim to help people save more money for retirement.
Data consultancy ITM has appointed Akash Rooprai as head of client management to lead its de-risking business.