Since 2003, the $50 billion Swedish pension fund AP2 has nearly brought every asset class in-house, except for one: private equity.
Despite several efforts, developing a quantitative model to replicate private equity returns has proven elusive and Tomas Franzén, Chief Investment Strategist at AP2, told [i3] Insights that it’s one of the few asset classes where it has accepted it has to pay fees for external managers.
“We have basically run an internalisation program over the last few years,” Franzén said.
“If you look at the traditional portfolio of listed assets, then you don’t see much that isn’t done in-house. Basically, everything is done in-house, but usually on a quant-based platform.
“We don’t have a huge number of analyst and portfolio managers running a number of active strategies on our benchmarks. We do it on a quant-based approach. They have the tilted indices as a starting point and enhance on that and hopefully added some return to it,” he said.
The decision to bring most asset classes in-house is both inspired by cost savings, as well as the realisation most external managers added little additional return in the past, he said.
It means the fund has now more to spend on private equity.
“The cost budget that we think we can use going forward is basically linked to the private sectors, where we cannot really manage it ourselves,” Franzén said.
“We are growing more and more into those strategies and we need to pay for that. We try to find approaches that are more easy to handle from a cost perspective even there, but we need to accept that it is going to cost a bit and you need to make room for that, so we try to save on the public [assets].
“It is a governance issue, I would say. It is really a matter of what you think you can afford and what you can achieve in terms of finding good managers,” he said.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.