EUROPE - Some of Europe's largest pension funds have acknowledged that the search for alpha - market outperformance - is a search for skills.
And they said it was paramount that active managers know how their skills produce alpha.
The representatives from Denmark's ATP, Ireland's National Pension Reserve Fund and Sweden's AP3 were speaking at the European Fund Manager Selection conference in London.
Lars Rohde, chief executive of the DKK360bn (€48bn) ATP fund, stressed the trend towards a clear divide between alpha and beta.
In this quest more external managers will be needed in the future, he is convinced. He said: "We will see a lot of outsourcing in he future also at ATP. We need more ideas than we are able to generate ourselves."
But not any manager will do. "The alpha teams must be skill-based. Where there are no skills, there is no exposure."
Eugene O'Callaghan from the €17.5bn NPRF agreed, saying: "There has been a greater questioning of added value from active management, particularly on an after-fees basis."
The NPRF is currently looking into give active managers more flexibility to apply their skills in areas where they are most comfortable.
In turn the passive mandates will also be made more flexible to ensure the portfolio's beta delivery. "In the past, passive mandates were given a fixed benchmark. Now it will be much more flexible.
"Depending on how the active side of the portfolio is made up at any time we will ask passive mandate holders to manage different chunks of money to different benchmarks at different times."
Diversification was the other keyword dominating the speeches. Cecilia Sved, head of global equities at the Swedish AP3 fund, explained that the €21.3bn buffer fund is currently selecting a manager for an emerging markets mandate which makes up 3% of the portfolio.
The fund looks for global diversification in its beta exposure and then goes on to identify potential alpha sources in each slice of the portfolio.
Sved also remarked that so far AP3 had not been using any consultants for decisions on their portfolio. "If everyone hires the same consultant the portfolios would look the same," she said.
For the NPRF and ATP diversification of the beta-portfolio means a move into other asset classes. Rohde hinted at a future move to further reduce equity and bond exposure to go more strongly into real estate, infrastructure and commodities futures.
"We are covering a wide range of asset classes to have a smaller part of total risk in equities."
O'Callaghan outlined the NPRF's 2009 portfolio as 69% equities (2004: 80%), 8% property (0%), 8% private equity (0%), 2% commodities (0%) and 13% bonds (20%).
"We are moving into alternatives to achieve an exposure to asset classes which have different characteristics to equities to make our fund more resilient," O'Callaghan told IPE.
He sees a definite advantage for sizeable pension funds to get into the good private equity funds. "Large buyout funds want investors to be around longer for their next fund and the one after that." NPRF will invest directly in private equity funds in Europe and large funds in the US, only using fund of fund structures if it wants exposure to small funds, e.g. US venture capital funds.
Earlier this months NPRF announced to invest €44m in specialist property fund The Mall as part of its €135m commitment to real estate. A few days later ATP said it was looking at real estate investments in the US.