Active management is "good business", says AP Pension CIO

The investment chief at Denmark’s AP Pension favors an active investment strategy. Why? Firstly, according to CIO Ralf Magnussen, scientific surveys argue the approach makes sense for a pension fund of AP Pension’s size. And secondly, it boosts returns.
Ralf Magnussen, CIO at AP Pension. | Photo: PR
Ralf Magnussen, CIO at AP Pension. | Photo: PR

For Ralf Magnussen, CIO at AP Pension, there is no doubt in his mind: An active investment strategy generates greater returns for customers.

"We use an active investment strategy because it's good business. And our returns demonstrate that," he tells AMWatch's sister site FinansWatch in an interview.

The CIO picks up a scientific survey, which is backed up by AP Pension's investment returns.

The US study, carried out by I. J. Alexander Dyck and Lukasz Pomorski, argues that the size of a pension fund is pivotal in terms of earning excess returns compared with benchmark returns.

Its authors contend that even small pension funds with just DKK 2 billion under management (EUR 2,700 million) can earn excess returns on equity, and the same applies – to a lesser degree – to bonds.

Magnussen has scrutinized AP Pension's financial performance, comparing it with benchmark returns, and found that the pension provider has earned 1.4 percentage points in excess returns since 2010.

He has also looked at the period since September 2015, when he was appointed CIO, and sees an excess return of 1.5 percentage points.

According to a pension fund survey carried out by Morningstar, AP Pension has reported its highest returns in the last three years in lifecycle products with a medium risk level and a 20-year horizon. AP Pension earned a return of 28.11 percent against the benchmarked 24.02 percent.

"Our excess return is a result of our successful equity investments," says Magnussen, adding that since 2010 equities have performed well and given AP Pension an excess return of nearly 2 percentage points.

"Our active asset managers are very skilled, and we took risks at the right time," he says.

Today, AP Pension has DKK 120 billion (EUR 1,600 million) under management, and 30 percent of that relates to equities. The major part of the portfolio is managed by external managers which are handpicked by AP Pension.

"We have relatively few investment mandates. Four global investment mandates represent a large share of our portfolio. They each have 40-50 equities, as studies say that actual active asset management is necessary, otherwise you just earn benchmarked returns," Magnussen says.

"If you have 10 investment mandates, and you think you are actively managed, you're mistaken. Therefore, it's key to have relatively few investment mandates and find out if they are in fact actively managed," he adds.

Insourcing of services

AP Pension plans to manage a larger share of its equity portfolio inhouse. Today, the firm manages 25 percent of its equity investments.

"We have an ambition to manage one third of our equity portfolio inhouse at the end of 2018. Ahead of that point, we've increased our staff and hired our new head of equity, Rasmus Cederholm. It's a team of five, so it should be possible," Magnussen says.

However, AP Pension has no intentions of dropping its external investment mandates.

"We're not going to let our investment mandates go as they perform very well. But we will reduce the number," he says.

In addition to four equity mandates, AP Pension outsources services for foreign property and investments in infrastructure. Danish property is managed inhouse, whereas 96 percent of the bonds are managed inhouse.

"We do have a few external investment mandates, because I prefer a situation with both inhouse and external asset management. Needless to say, an investment manager's job is deliver a product and a return, but it's also to share knowledge with our organization so we get a holistic investment strategy and process," says Magnussen.

Economies of scale

AP Pension has only a few passive investments, although it is very popular due to low costs – because a penny saved is a penny earned. However, that's not always the case, argues Magnussen.

"Passive investments can be preferable if you're a private investor. However, if you buy a fund which is actively managed, they fee is about 2 percent. If you buy a passive fund, such as Sparindex, you pay 0.5 percent," says Magnussen and adds:

"If I, on behalf of AP Pension, buy a passive investment from Sparinvest, I pay a fee of 0.1-0.2 percent. In doing so, I do have a huge advantage as a private investor. At the same time, I have the resources to find the high-performing investment managers."

That was the reason that AP Pension decided to mothball its passive savings product, Basis, in 2016. The customer base was too small, and the return was not as high as from the active products, Magnussen says.

The Dyck and Pormoski's survey argues that if you invest in illiquid assets, often referred to as "alternative assets", size is pivotal in terms of earning an excess return.

According to the survey, the largest pension funds can earn an excess return of 1.3 percentage points compared to benchmark returns. AP Pension ranks 87 in Europe, and with DKK 120 million under management, they close in on the large investor category.

"A small investor has to buy an expensive fund-of-fund solution. It's super expensive, and it requires that you find an asset manager who is able to earn an excess return. Large investors can invest much more money directly because of their size," says Magnussen.

Investments through funds

AP Pension invests in Danish property, but decided to use external funds for investments in foreign property, infrastructure and private equity.

"We decided to invest in Danish property inhouse. We perform very well, and it's an advantage that we can go and speak with the mayors," Magnussen says.

AP Pension feels so comfortable with the Danish property market that they also operate as property developers and lend money to other developers.

"We're fond of these loans, as the collateral is of a size that, in the event of non-performance of the loan, we take over the project and manage it ourselves," says Magnussen.

For instance, AP Pension has a property development project on three Copenhagen islands. The pension fund is responsible for the development of one island and lend money to the developer on the other two islands.

However, when it comes to other types of loan, AP Pension opts out.

"We're reluctant to give loans to a company where we need to trust the outlook, because we cannot take on a company and operate it ourselves. But we can take on a property and operate it," says Magnussen.

Nevertheless, in the past year AP Pension has invested in two Danish banks, Vestysk Bank and Nykredit. Vestjysk Bank has tripled the value of its equity, and Nykredit is a long-term investment.

"The joint venture we are part of holds a 17 percent stake in Nykredit. It's a long-term investment which fits well into our strategy. We want to invest in objects that make good returns, but still have a lower risk than the equity market," says Magnussen.

English Edit: Lisa Castey Hall Nielsen

Sign up for our newsletter

Stay ahead of development by receiving our newsletter on the latest sector knowledge.

Newsletter terms

Front page now

Further reading