Active engagement in the indirect investment market is a strategy which has won the Danish pension fund ATP the accolade of Best Nordic Fund, an award sponsored by Rockspring. ATP Real Estate's international indirect investment programme was set up in 2002 with an initial allocation of €600m. This makes up a few per cent of the fund's total portfolio of €47.6bn, as at the end of 2005.

As frequently happens with a long-term asset class, the property portfolio was slow to take off; its return for 2003 was only 2.7%. The following year, it lost 2.4%.

But in 2005, the property portfolio came good, returning 13.2%.

With the initial money nearly all committed, the success achieved so far has encouraged ATP to allocate further funds to this area.

ATP says it was clear from the start of its real estate investment programme that the relative immaturity of the property market, together with its lack of transparency, amounted to significant obstacles for new investors.

The fund therefore created a set of principles that it saw as the likely keys to success. One of these principles was the fund's active engagement with managers at all levels of its investment operations.

It is this active engagement, coupled with a clear and consistent strategy for its property investments, that has been the key to ATP's excellent performance as an indirect property investor.

The primary goal of active engagement, according to ATP, is to protect and improve the return from its real estate investments. However, as a major European investor, it also considers it has a responsibility to develop the indirect property investment market, and sees active engagement as a way of doing this.

The fund stresses that active engagement does not contradict the basic principle of investing indirectly, as long there is an understanding of what active engagement means. What it does not mean is daily involvement with the chosen fund manager.

Instead, the investor should focus on making sure that the terms of any property transaction make them clearly aware of when is the right time to focus on the detail -- and therefore to engage with the manager.

There are two mechanisms which help achieve this: good corporate governance and appropriate alignment. ATP RE swiftly rejects investment opportunities where these two mechanisms are not working properly. At an operational level, ATP RE runs a proprietary monitoring system enabling it to manage and evaluate the actual performance and conduct of its fund managers. The data from this system generates a balanced score card which is used for quarterly management reporting.

However, ATP says that active engagement alone is not enough. There must also be continuous dialogue, and face-to-face meetings with the fund managers running the property investments. This ensures that personal relationships are maintained at the right level to secure appropriate information flow to ATP RE. The fund's commitment to transparency within its own organisation is a key element in strengthening this dialogue.

Furthermore, ATP says there has to be a common standard for good corporate governance relating to indirect property investments as an asset class. But it says that creating this definition is a duty of the industry as a whole. This is one of the reasons behind ATP's active involvement in establishing the European Association for Investors in Non-listed Real Estate Vehicles (INREV), and its participation in the corporate governance guidelines programme which INREV has set up.

Besides encouraging industrywide moves, ATP has also taken the initiative at the individual investment level. On several occasions as a leading investor, the fund has pushed for the introduction of good corporate governance principles, for the benefit of the whole investor base.

Where good corporate governance principles are being flouted, the fund takes action, communicating with the manager in question.

ATP says that in its own experience, breaking these principles is seldom a case of willful misconduct. Instead, it is usually just a failure to appreciate the investor's point of view.

However, the fund believes that communicating with fund managers, and proactively challenging them where necessary, also has a beneficial effect on the indirect investment market as a whole.

A second key factor in achieving performance is alignment. This is the principle of ensuring a fund manager always acts in the investor's best interests, because this coincides with the fund manager's own best interests. To achieve this, several elements in the overall alignment package must be exactly right. The most important of these are size, timing, getting the right people included in the alignment programme, and symmetry of investment objectives (downside as well as upside).

While these principles may be obvious, ATP believes that their importance should not be underestimated. Alignment packages offered by fund managers are becoming increasingly sophisticated. But while these often lead to better congruence of objectives, there is also a growing risk that the basics will be completely obscured by complicated legal draughtsmanship.

Because of this, ATP says it is vital to evaluate whether an alignment package is up to scratch. The growing complexity of this issue dictates that it is given prominence when developing ATP's inhouse resources.