AP7's 'pure alpha' strategy
The Skr 53bn (E5.6bn) AP 7 fund, the default fund for the Swedish PPM system, plans to introduce a ‘pure alpha’ strategy next year.
What distinguishes this from the separation of alpha from beta that other asset managers are introducing is that it will involve no transfer of capital to the alpha manager.
The strategy is seen as a long-term overlay to the fund’s current strategic asset allocation to equities and fixed income.
Peter Norman, the chief executive officer of AP7 unveiled the new strategy at a round table of CEOs at the IPE Awards ceremony in Berlin.
“A pure alpha concept means that no money is transferred to the managers. We want managers to produce alpha for us in any way they choose through equities, fixed income – or fine art if they wish,” he said.
Outperformance will be calculated with the zero line as a benchmark, he said. “If the managers need money, we say that they should either work with derivatives or go short in the cash market.”
The strategy is similar to that used by currency overlay managers, he said. “Currency management is one application of this idea. Our idea is that you could use the same way of working both in the fixed income and in the equity market.
“With a pure alpha strategy there is no beta leakage. The consequence is a more efficient use of the risk budget. Capital is not restricting the number of alpha generators and beta is generated in the most efficient way, through indexing.”
AP 7 has not decided yet how it will reward its pure alpha managers, Norman said. “The cash is zero so some new calculations need to be done. The old pricing isn’t suitable.” He said the pricing structure was likely to include some form of performance fee.
In-house investment managers are currently trialing the pure alpha concept, Norman said. “The AP 7 board has decided that as a first step we should let the internal management work in this direction and we have done so now for the past five or six weeks.
“Our asset managers tell me it is good fun but it’s also a bit scary because it’s so transparent. There’s no possibility of hiding behind the beta.
“We are now interested in moving to the next step, which is also sanctioned by the board, to take on external mandates.”
To date, no external manager has come forward with a proposal, he said. “So far the industry has been quite reluctant, although I am quite optimistic. I have a genuine and ongoing dialogue with a number of providers so I would definitely hope that within the first half of next year we would see something on the market.”
AP7 is currently re-tendering all but one of its asset managers, because the time limit of five years for each mandate, stipulated in Swedish law, has been reached.
However, the re-tendering has nothing to do with the new strategy, Norman said. “The pure alpha is a more long-term vision and right now we have to do this tender because it’s reached five years. So there is no linkage between them.”