AP7 paves way for first risk factor investments

Swedish national pension fund AP7 has put out a tender for advice on “active alpha” procurement as the fund prepares to add risk-factor investments to its portfolio for the first time. 

AP7, the SEK430bn (€43.1bn) default provider of the premium pension portion of the country’s state pension, said it was looking for between eight and 12 managers to run strategies in three categories.

These categories are long/short equity, long/short risk-factor strategies and risk-reducing strategies. AP7 is looking to allocate five to 10 mandates in the first category, between one and three mandates to the second and between one and three for the third category.

The pension fund’s CIO Ingrid Albinsson told IPE: “The specification of risk-premium mandates in the search is part of the diversification effort that has been going on since last year in the equity fund.”

The procurement of long/short risk premium mandates, however, was part of a regular process at AP7, she said, with the fund having had the mandates in place since 2005.

Albinsson told IPE a year ago that the fund was considering the use of risk factors for diversification purposes.

Asked how much of the portfolio AP7 would allocate to these risk-factor mandates, Albinsson said this had not yet been fixed.

“The procurement is in an early stage and the allocation has not been decided, more than the fact we will be looking for one to three mandates as described in the procurement information,” she said.

The risk-factor investments will focus on equities and currency exposure, she added.

AP7 operates a large equity fund – mostly a passive global portfolio with an extra 25% of market exposure through leverage, and a smaller fixed-income fund. The two funds are combined for individual savers using a life-cycle approach.

The passive global part of AP7’s equity fund is managed by external managers, and on top of this, it has a number of private equity and what it calls “active alpha” managers.

The deadline for applications in response to the tender for advice is 8 March.

In May 2017, an IPE focus group poll showed most European pension funds in a sample had allocated funds to strategies using risk-factor investing concepts.