nrpn: AP1 recently restructured its operations and announced it is moving away from active management. Why?

Our active management has been relatively successful. Our aim was to outperform our benchmark by 50 basis points per year. We reached 35 basis points during a five-year period, while the other AP funds were negative. However, AP1 was only the third in size out of the four buffer funds, which all started out with the same amount of assets. So our active management performed well, but there were other things that did not work as well. These were the strategic portfolio and the composition of assets.

nrpn: Why does that mean that you have to reduce active management?

It’s hard to succeed with active management. In order to do so, it needs to be the number one priority. All our resources went into supporting active management and I think that is a prerequisite to being successful. During the evaluation, it became clear that it would be difficult for a small organisation like an AP fund to have two distinct focuses. We had to decide what was most important, and we decided that having the right long-term mix of assets and the resources to support and work with, should be our priority.

nrpn: How much freedom have you got on your strategic asset allocation policy under the existing investment regulations?

We need to have at least 30 per cent in fixed income, no more than 5 per cent in unlisted assets and are banned from investing in commodities. Our 5 per cent of unlisted assets is dedicated to private equity, but we have the possibility to invest in other asset classes, such as hedge funds, infrastructure, high yield and different kinds of fixed income assets. There are limitations, but still a lot that we can do within the existing framework.

nrpn: Are the investment regulations not a problem then?

They are and we have said so several times. But within the existing framework, we still have the opportunity to create a good portfolio. I also believe that the regulations will change, something the government recently indicated; but it will probably take some time.

nrpn: Doesn’t it feel sad to leave active management behind since you’ve been fairly successful?

I think it’s a misunderstanding that we’re abandoning active management. When we describe our model, people think that we will focus on asset allocation and only use indexation. What we intend to do is to have a wise and well thought out management. We are not saying that indexation is better than active management. In some markets it is and in others not. In some areas, like fixed income, we will continue as before. But about 40 per cent of equities are managed externally and we will take that in an indexed or a more enhanced direction. That’s a matter of cost. We will, however, keep active managers for the parts where we feel we get value for money.

nrpn: Is there too much pressure on the AP funds to keep costs down?

We need to be aware that we’re operating in an environment that is sensitive to cost, sensitive to low returns and dependent on the public having confidence in the AP funds. That sets the preconditions for what we can do. For example, we can’t use active management for our entire portfolio. That would cost too much and simply isn’t an option.

nrpn: There’s increasing pressure on the AP funds to co-operate as a way of reducing costs. What is happening with that?

Together with the other AP funds, we’ve started looking at areas where we can co-operate and the effects that would have. That’s still a work in progress. What I can say is that it doesn’t refer to the areas where the AP funds compete, such as analysis and how we set up our portfolios. On those areas, we can’t co-operate unless the structure of the AP funds changes. However, we all have back offices, middle offices, personnel departments and IT departments that we could run more efficiently without harming the competitive environment. We had a similar discussion a few years ago, which resulted in the formation of the AP funds joint Ethical Council. But co-operating also comes at a cost. The numbers that the politicians are talking about are completely different figures from what we see. I have been surprised by some of the numbers mentioned and I’m not sure how they reached them.

nrpn: Do you to some extent feel that the AP funds are misunderstood?

I’m not sure if we’re misunderstood, but we have a difficult role as buffer funds in a large pensions system. In general, I think that the funds are suffering from people not fully understanding the system and how the AP funds fit in. Not just us, but also the other AP funds need to get better and clearer in explaining our role in the system. The fact that pension payments will now be lower has to do with several things. But it’s easy to say that pensions are down because of bad management from the AP funds.

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