Iceland’s second-largest pension fund has revealed a major overhaul of the way it invests in foreign equities, in which it has shifted the entire $2.5bn portfolio to segregated managed accounts (SMAs) from pooled funds — as the first Icelandic pension fund to make such a wholesale shift.
In an interview with IPE, Arne Vagn Olsen, chief investment officer of the Pension Fund of Commerce (Lífeyrissjóður verzlunarmanna, LV), announced that the ISK1.46trn (€10bn) pension fund had conducted the transition to SMAs alongside two other big investment exercises over the last 18 months – the engagement of a new custodian and work to define asset-owner objectives and resetting the fund’s strategic asset allocation (SAA).
Olsen told IPE: “I’m happy to say we are finalising the last part of the transaction next week, then we will have moved $2.5bn from UCITS funds to SMAs in 2025.”
The investments LV has switched from UCITS funds to SMAs – in pursuit of a range of cost and other benefits – constitute all of its foreign public equity assets, which make up around half of the pension fund’s foreign assets and a quarter of the entire ISK1.46trn portfolio.
All LV’s foreign public equities are invested on an index basis, and will continue to be passively managed in the form of segregated accounts.
“We identified 18 months ago that it would be a smart step on our behalf to move to SMAs, that there would be additional benefits besides financial ones that would benefit us in the long run, such as a stronger relationship with our managers, and better compliance overviews, tax benefits, so that was the route we wanted to go down,” he said.
To run the SMAs, the CIO said LV picked three asset managers.
“They are very well-known names. Big recognised institutional global players we feel comfortable handing these operations to,” he said, but declined to name the three firms.
“To my knowledge, we are the first pension fund undertaking this exercise for this large part of our portfolio in Iceland,” he noted.
“We identified 18 months ago that it would be a smart step on our behalf to move to SMAs”
Arne Vagn Olsen, LV’s CIO
“Some have had segregated managed accounts for the more active parts of their portfolio for some time, us included, but I believe we are the first one in Iceland to make this move in terms of moving from UCITS funds to SMAs for all of our public equity portfolio outside of Iceland,” said Olsen.
It was in preparation for the move that LV sought out a new custodian which would be better suited to service the fund in the context of SMAs, he explained.
As announced earlier this year, LV appointed JP Morgan as the new custodian of its foreign assets portfolio, switching from Brown Brothers Harriman.
The third building block of LV’s investment management overhaul has been a thorough exercise over the last 12 months of codifying the pension fund’s asset-owner objectives and undertaking a five-to-10-year, long-horizon SAA exercise, which Olsen said “steadies the course and aligns decisions with member outcomes”.
The fund chose consultancy Mercer to guide it through the twin processes, having first considered engaging other firms.
“This has involved significant work on both sides, and the collaboration has been very strong,” Olsen said.
“In hindsight it is highly ambitious to undertake all of this at the same time – each one of these tasks, hiring a new custodian, transferring from pooled funds to SMAs, and going through a strategic review – each one amounts to around a year’s work. But we decided it would be extremely beneficial to get this part going as well,” he said, adding that the trio of projects has been running at the same time and in conjunction with the daily operation of the pension fund for the past 18 months.
“I believe we’re now set for the future in how we’re going to run things in terms of form – this is the form we would like to hold them in the future, segregated mandates with a global custodian who will help us do the heavy lifting,” he added.
“This is the right direction for the fund and for the members, it is going to yield an even better return. It is basically a no-brainer,” the CIO said.
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