Since taking over as CIO
of Swedish public pension AP1 in December 2013, Mikael Angberg
has set about reforming the fund’s investment processes. In May he picked up a CIO Europe
Innovation Award for governance, and after a busy summer found time to discuss
his 20 months at the helm of the SEK 284 billion
(€30 billion) portfolio.
CIO: At the Influential Investors Forum there were representatives from Sweden, Norway, Denmark, and the Netherlands, as well as the UK. You obviously work a lot with the other Swedish AP funds, but do you think there is scope for more cross-border collaboration between pensions?
Angberg: There’s definitely scope for—and tremendous value in—collaborating more with Swedish, European, and international pension funds and money managers. The challenge for everyone is always time. We’re all very busy and it is hard to carve out time to reach out to peers. I find it a frustrating situation because it would be tremendously beneficial, but it takes time and effort—and it takes time and effort away from problems that could be solved by collaborating more in the first place! Forums like CIO’s, and informal forums, are extremely valuable. There is a growing trend among large institutional investors to collaborate on transactions, investments, and thought leadership around portfolio management. You very easily find yourself in a bubble of day-to-day stuff at work, and it requires discipline and the right forums and platforms to be able to go outside of that. When you do, you realise it’s tremendously valuable.
Art by Victor JuhaszCIO: We’re glad you found it so useful. AP1 also won an Innovation Award for governance—why would you say the fund deserved to win? What sets your model apart?
Angberg: We studied the best practices across the industry to find out the key criteria in governance that tend to lead to successful investment organisations. Then we implemented them to the extent we thought was doable, and we came a long way. What it boiled down to in the end was—and perhaps this is why people look at our structure and think it’s a good one—it has a lot of clarity and a clear separation of duties between the board and the investment organisation. It’s all about clear delegation, a clear separation of duties, accountability, and reporting feedback to the stakeholders.
CIO: Was this something you brought in when you joined in December 2013?
Angberg: Even before I joined a lot of work had been done, so it was already anchored with the board and the investment organisation that an efficient governance structure was a key component of long-term success. I took over the conclusion of that work. I felt that in order to utilise optimally the risk budget that we got from the board, we needed to have very robust processes around asset allocation, and a very good handle on the exposures we wanted in the portfolio. We also needed to be organised to manage these processes optimally. Together with colleagues, I devised a new asset allocation process. It uses different time horizons, and different exposures within those time horizons, to create alpha. It’s based on a simple and repeatable process with a macroeconomic focus, and importantly it’s a framework that leverages all the smart people I have within the organisation. For instance, we have extremely skilled stock pickers, so I organised portfolios so they focus only on finding good companies. It’s streamlining the way we’re organised to make sure we use people’s skill sets optimally.
CIO: And did the new processes help you decide how infrastructure investments, such as the recent purchase of electricity distributor Fortum, were going to fit?
Angberg: Yes, they did. In the context of asset allocation we see infrastructure as a really important long-term addition to our portfolio. It offers stable, often inflation-linked cash flows, and an attractive total return. Importantly, it allows us to exploit what is our most important competitive advantage: long-termism. The transaction with Fortum was a direct investment in which we partnered with like-minded institutional investors in a consortium. This couldn’t have been any better in my view: the collaboration was extremely professional. Despite this very strong, high quality setup we had, completing a direct transaction of this size takes a long time, requires a lot of work and different skill sets.
CIO: What advice would you give to a first-time investor in infrastructure?
Angberg: Investing directly carries a lot of benefits but it’s easy to underestimate the workload and the resource requirement. You need to think that through very carefully beforehand, and look at the whole life of the transaction and beyond that, because it’s an ongoing, long-term resource commitment.
CIO: The AP funds are particularly forward thinking when it comes to environmental, social, and governance (ESG) investing. When this was brought up at the forum, there was a significant difference between the UK and European perspectives. Are we Brits a bit behind the times on this subject?
Angberg: My impression is that some UK investors are focused primarily on ESG as a separate activity, not as value creation per se. Integrating ESG thinking manifests itself in things like AP4’s initiative to decarbonise investments, and our own study of the climate change risks to our asset allocation framework. At AP1, we have really integrated ESG into our everyday business. We see financial risks and opportunities in it, so it goes with our mission to generate returns and manage risks.
CIO: AP4 CEO Mats Andersson recently said about a sustainable water investment mandate that it isn’t about charity—they want to make money out of it.
Angberg: Absolutely, and at AP1 we’ve been very firmly in that camp. These are complex issues, and they are further complicated by the time horizon which one adopts. Something that is not profitable in the long term can be in the short term. Ultimately he’s absolutely right. It’s not charitable work; it’s to improve the long-term returns for pensioners—and not everything will be priced in today.
CIO: How much have your previous roles informed your approach at AP1?
Angberg: Generally the role I have is very diverse: it allows me, to the best of my ability, to think about what have I learned that works well at [previous employers] such as Goldman Sachs or PIMCO. Our investment process to a fairly large degree is influenced by my experience at PIMCO, and the culture at Goldman Sachs is something I valued tremendously, so I would like us to have a strong corporate culture.
CIO: What’s the next challenge for Mikael Angberg and AP1?
Angberg: Something that goes hand-in-hand with the work we did on the governance structure and the investment process is continuous improvement. There are a lot of things going on in all asset classes, but most important for this year is to consolidate the work of previous years and make sure that the process, teams, and mandates work as they are meant to in production mode. One of the most important criteria in this business is continuous improvement and evolution—not standing still. I think we’ve created a platform with processes and forums to ensure that we achieve that. We are continuously looking to the horizon to try to understand where we, the industry, and the world are going.