Mats Andersson to Receive Lifetime Achievement Award

Mats Andersson, AP4, at Cop-21 Mats Andersson speaks at COP-21 in DecemberAP4’s departing CEO Mats Andersson is to receive the Lifetime Achievement Award at CIO’s European Innovation Awards in June.

The award recognizes Andersson’s leadership of the Swedish public fund and his contribution to international projects on sustainable investment and climate change. Angelien Kemna, chief investment risk officer at Dutch fund APG, was the inaugural recipient of the award last year.

Andersson announced at the start of this month that he was stepping down from Sweden’s largest public pension after 10 years at the helm.

When he joined in 2006, AP4 had SEK 180 billion ($22 billion) under management and was the smallest of the four main AP funds that back Sweden’s state pension system. Despite double-digit returns in 2003, 2004, and 2005, the fund was a perennial underperformer compared to its benchmark and sister funds. Politicians began probing the fund’s management and strategy.

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“Climate change investing is not about charity or good public relations, it’s about dealing with risks. If you do that properly you will enhance your returns in the long term.”Enter Mats Andersson in December 2006, a former Deutsche Bank investment banker and AP3 portfolio manager. More than a year later and it was clear this was not going to be an easy fix: the global financial crisis had begun to take hold and the fund once again underperformed. With an honesty typical of many Swedish investors, Andersson summed up his first full year in charge as “very tough” in the 2007 annual report.

In 2008, he brought in Magnus Eriksson, a former colleague at AP3, as CIO, among a raft of new appointments. In 2010, Andersson declared that he wanted the portfolio to become the biggest of the AP funds—many doubted his ability to achieve this ambitious goal.

They deployed a new investment strategy, aided in 2012 by a revised long-term strategic mandate from the fund’s board.

Last year, true to the CEO’s aim, AP4 became the largest of the quartet with more than SEK 310 billion under management. It has outperformed its benchmark seven years in a row.

Andersson declines to take much credit for this remarkable turnaround. “I have always stressed that I have never run one penny. It is really down to my super colleagues—and they are still here.”

“The need for long-term investment has never been greater than it is today,” Andersson adds. “My view is that pension funds by their nature are very long term, but on the asset side they are evaluated on a yearly basis—that is a conundrum for me.”

Long-term investment means taking positions such as the fund’s “huge home bias” in its equity allocation. While Sweden’s equity market is often more volatile than others from one year to the next, it has outperformed both the MSCI Europe and MSCI World indexes over 10 years.

“It’s a tragedy that many pension funds don’t have the possibility [of a long term mandate],” Andersson says, adding that impending European regulations such as Solvency II could put up further barriers to strategic investing.

Long-termism has also aided AP4’s—and Andersson’s—work on climate change risk management. In September 2014, Andersson was a co-founder of the Portfolio Decarbonization Coalition (PDC) in conjunction with other asset owners, managers, and the United Nations, which aimed to cut the carbon footprint of pension assets.

“We set the target of $100 billion of pension capital to be decarbonized by COP-21,” Andersson recalls. As the climate change conference in Paris loomed large, Andersson says he found himself “preparing a speech to explain why $45 billion or $50 billion was good enough.”

However, when he stood up in front of delegates—alongside former US Vice President Al Gore and former New York City Mayor Michael Bloomberg—at the beginning of December last year, the $100 billion target had been hit. Six times over.

“I could never have imagined this five years ago,” Andersson says. Talking then to pension funds about risks, asset owners would list various measures of investment volatility. “On climate change, nothing.”

“Risk to me is the risk of permanent capital loss,” he explains. “We can stand volatility. Most pension funds can. This is not about charity or good public relations, it’s about dealing with risks. If you do that properly you will enhance your returns in the long term.”

Politicians and government-appointed board trustees may not know what is best for pension fund investing—and may even be a cause of poor returns, according to a recent paper.

Public pension board composition had a strong impact on the fund’s private equity performance, wrote Erasmus University’s Aleksandar Antonov, Rice University’s Yael Hochberg, and Stanford University’s Joshua Rauh.

From a study of 210 US public pension funds with more than 13,000 private equity investments from 1990 to 2011, the authors found funds with boards heavily made up of elected officials or members appointed by state representatives underperformed the worst.

Specifically, state-appointed board members were linked to the lowest performance, with a 10-percentage point increase in the proportion of such members resulting in about a 0.9 percentage point drop in annual net internal rate of return (IRR).

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And ex officio board members followed suit, with a 10-percentage point rise in their representation leading to a drop in annual net IRR of between 0.53 and 0.67 percentage points.

“This underperformance is related both to investment category allocation and to selection of managers within category,” Antonov, Hochberg, and Rauh continued.

The research revealed funds whose boards housed more state officials and elected plan participants invested more in real estate and fund-of-funds.

These poorly governed funds were also “strongly correlated” with poor investment decisions in private equity including overweighting in small and in-state funds, as well as allocating to inexperienced general partners.

Despite associations to low performance and ill decision-making, these state-appointed and state-ex officio trustees represented 7.6% to 25.4% of board members of 34 studied pension funds on average, the research found.

Trustee background data also showed only 21% of members selected by government executives had asset management experience, and just 10% had any financial experience.

Figures dwindled further for elected officials serving on pension boards, with 18% and 10% with asset management and financial experience, respectively.

Read the full paper, “Pension Fund Board Composition and Investment Performance: Evidence from Private Equity”.