The Stockholm-based FSO, the Pension Insurance Society for Government Employees in Sweden, has given its first overseas mandate to Barings Asset Management (BAM) in London.
The brief is for an active/passive portfolio with an initial investment of Skr560m($70m).
The objective is the outperformance of an equally weighted G5 benchmark in Swedish Kroner terms," says Mark Leader of BAM. This is the manager's first active/passive portfolio win in Europe, though it says it has over $500m in segregated portfolios for Scandinavian clients.
FSO, which was established in 1993 to provide supplementary pension benefits to government employees, has built up assets of $800m.
FSO managing director Sven Benestam says he wants to increase the equity component of the fund, which has been 20% in domestic equities and 80% in local fixed interest, and to diversify outside the Sweden. The proportion in bonds will now fall to 71%. "I think it is very difficult to run a foreign portfolio from Stockholm," says Benestam, says on the decision to use a non-domestic manager.
He says the fund has decided on a fixed 8% proportion of the assets should be allocated this portfolio. But FSO wants to increase by a further 3 percentage points the amount in non Swedish equities, but no decision has been taken on this.
Originally, the discussions had been about developing a global equity portfolio, but Benestam says FSO was concerned about the administration and reporting burdens this would involve.
BAM's Leader says that he suggested the active/passive product that Barings runs for US pension funds might be adapted to meet the Swedish group's needs. The active/passive approach, which Barings adapted from its US business where it has built up assets of $3.4bn for mainly US pensions clients since 1988. This uses a range of indexed country funds, with the aim of outperforming the market by active asset allocation between these funds.
This appealed to FSO. "We do not have any administration here with just five index fund titles," says Benestam, who believes the index approach is a good one for the fund currently. "It is very difficult to beat the index. So we feel that we will get at least as good results as the index an perhaps even better, with Barings on the active side."
The lower costs of indexation was important to FSO, he points out.
From early this year, discussions were in hand as to how the US approach could be refined, Leader says. The ultimate benchmark was reached as a result of these discussions and it reflects the investment portfolio and the fund's liabilities. "It was a long process." Looking at the equally weighted G% figures historically, Leader says, the risk and return characteristics did not differ significantly from a fully diversified portfolio. Benestam says: "The historical results were matched through different Barra calculations. Surprisingly, we found that risk does not increase by keeping to just five different markets. We even found we could add some value."
BAM has the ability to move across the markets within certain constrains, as part of the active allocation approach. "In addition, we can implement currency hedges on top of that, but also with maximum and minimum constraints."
In the US, BAM has used State Street indexed funds. "For the European markets, we will be using State Street Global Advisor's European registered funds rather than its US funds," says Leader. He believes that the active/passive concept may be a concept that will appeal to investors in Europe. BAM regards it as one of the ways that funds can diversify and still look for out performance. "Around 80% of our performance can be attributed to asset allocation and currency management.""