Alecta, the SEK1.19trn (€105bn) institution that manages the Swedish ITP private-sector pension scheme, is being probed by Swedish regulators for the €1.9bn capital loss it experienced earlier this year, as the three US regional banks it invested in – Silicon Valley Bank, Signature Bank and First Republic Bank – collapsed. The institution reacted by firing its influential CEO Magnus Billing.
Billing was a proud advocate of Alecta’s approach to equity investing, which consisted of running a concentrated portfolio, a somewhat contrarian way of doing things for an institution of its size.
But Alecta had the capacity to do it, because of its high solvency ratio, its array of internal resources and proven risk management and governance structures. Perhaps that is why a failure of such small magnitude compared with Alecta’s overall portfolio had such a big impact on the organisation.
The episode reignited the debate about the benefits and risks of concentrated equity portfolios versus those of large, diversified portfolios, which encompasses questions about stewardship, engagement and governance. Running a concentrated portfolios usually means being an active if not an activist investor, and this has clear benefits for investors with sustainability objectives and a clear vision about their stewardship mandate.
As our article in this month’s portfolio construction report shows, investors have a wide variety of answers to the question, with most applying a combined approach that includes active equity management to different extents.
However, Alecta’s case, and others involving large, high-profile institutions such as ABP and PME, suggest that the only wrong choice is the one that carries more risk but also potentially greater reward.
It pays to reflect on the notion that investing in passive or semi-passive strategies with low tracking error will hardly get a pension executive fired.
At the same time, making conscious, high-conviction choices that include environmental, social and governance (ESG) and sustainability considerations exposes pension fund leaders to much greater personal loss.
This speaks both about cognitive biases – loss aversion, for one – and about a fuzzy concept of investing, which requires taking risk. Critics will contend that running pension money is not necessarily investing and more about safeguarding members’ retirement. They will make the point that Alecta took undue risk on those investments.
The main argument, instead, is that pension schemes have a collective responsibility to shape the future of their members. Allocating capital responsibly and delivering returns is not a choice for them if they want to achieve their goals of securing their members’ retirement in a world that is worth living in.
They have a choice, however, over the way that capital is allocated. They should not be blamed for choosing to allocate it to what they perceive to be productive, well-managed, sustainable companies that treat employees responsibly.
Whatever the reasons that brought Alecta under the spotlight for some bad investments, it seems that the question will never be resolved in favour of those taking appropriate risks for a worthwhile purpose.
Carlo Svaluto Moreolo, Deputy Editor
carlo.svaluto@ipe.com
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