Last month I spoke to Katrine, who has taken over as CIO at PensionKøbenhavn, to discuss the co-operation agreement we signed a couple of years ago. When we finished talking about wind farms we discussed risk-and-return sources. Like some of the large Danish pension funds, PensionKøbenhavn has done a lot of work on this subject.
‘We used to have over 20 asset categories,’ Katrine tells me. ‘Now we have four return sources, interest rates, liquidity, equity and inflation.’ This is quite a transformation. ‘We had to work hard to get the buy-in of the board but they are pleased with the new approach.’
A few days later I am at a conference on portfolio management where a key topic is smart beta. Or enhanced beta. Or factor investing, depending on your perspective.
One Dutch pension fund talks about applying risk-factor investing to multi-asset portfolios and the associated complexities. There is talk about divesting from hedge funds and the fact that many hedge fund strategies are driven by observable risk premia that can be captured on a passive basis.
‘We dislike the term smart beta,’ says John, from BIG Asset Management, over coffee during one of the breaks. ‘It implies that market-cap beta is somehow dumb. And as a provider of active and passive strategies of all kinds we try to be agnostic as possible.’
The investment committee of Wasserdicht pension fund in the Netherlands doesn’t pay attention to marketing labels, but it does look closely at new strategies and ideas when it can.
A few years ago, we made an allocation to a low-volatility, active-quant strategy provided by a local asset manager. Now the investment committee wants to investigate the passive-equity portfolio and also new ways to think about our bond holdings. Erik, our external investment committee member, is helping us with this project.
On the way back home, I read Erik’s memo to the investment committee with the outline of a proposal to allocate to passive smart-beta strategies instead of market-cap indices. On the way to the plane I bump into Ronald, my old friend who recently became CEO of Pensioenfonds Vorkhef and we talk about smart beta.
‘My investment committee is worried about marketing fads but they appreciate that a traditional market-cap portfolio carries considerable concentration risks and that diversification of risk premia, at the least, is a better approach,’ he tells me. ‘Like you, we want to use a new approach and are investigating the various options. But we have banned the term smart beta from our discussions. We think it concentrates the mind.’
‘I have a different take on this,’ I tell Ronald. ‘Will we have any risk appetite in the future for equity investments, alpha or beta, smart or not?’
Pieter Mullen is investment director at Wasserdicht Pension Funds