The head of equities at a NOK42bn (€3.79bn) Norwegian pension fund has opened up about how the lean operation picks external managers and monitors them, saying the pension fund will drop a third-party fund rapidly if a key member of the team quits.
Frode Veiby, head of equities at Fellesordningen for AFP (AFP), said in a webinar: “If a critical member of the team left, we would definitely disinvest quite fast.”
Speaking in the online interview organised by US manager data provider eVestment – which AFP uses – Veiby described the pension fund’s ongoing process of monitoring its external managers.
He said that from AFP’s point of view, a typical warning sign from the metrics would be a dip in performance, or changes to the risk level, but that key personnel changes would also sound the alarm.
“When we are investing in a new fund, what we find is not a company but a team of portfolio managers behind the strategy, and if one or several people in that team were to leave that would definitely be a large red flag for us,” he said.
Based in Lysaker, west of Oslo, AFP is a tariff-based pension scheme for the private sector which supplements the Norwegian state pension.
Speaking about the pension fund’s approach to ESG when outsourcing investment, Veiby – who works with a team of just four investment staff – said that although AFP had firm responsible investment parameters, it did not have a particular ESG approach it imposed on a manager’s strategy.
“We solely invest in externally-managed strategies, preferably existing vehicles, so because of that we have to accept there are many ways to approach this subject,” he said.
Veiby said AFP’s initial selection process for external managers was quite similar to that of other institutional investors or consultants when it came to screening and selecting a new manager.
“If one or several people in that team were to leave that would definitely be a large red flag for us”
Frode Veiby, head of equities at AFP
The first step was to build up the universe, and the next step was quantitive deselection, he said.
“This is mostly about historical performance and we select based on that, and then we dig into the quantitative screening. That is about holdings-based, performance-based analysis,” he said.
Veiby said he thought eVestment was a strong tool for this.
It was then necessary to decompose the performance of external managers, he noted, in order to understand what had been driving the performance and see if there was a link between that and how the manager expressed the philosophy and the process of the management strategy.
“The last step would be the qualitative assessment, that’s more about gathering the data and interviewing the manager,” Veiby said, adding that this had become more difficult during the coronavirus crisis.
As part of AFP’s detailed quantitative assessment of potential managers, he said he and his team would look to see if there had been any style drift at the external fund level, and at whether outperformance had been achieved over a short or longer period, among many other factors.
“These are typical observations we would discuss with the manager. They would typically present us with the investment strategy and how they generate ideas and how they construct the portfolio, and if we have any observations that are not in line with what they say, these are things we would discuss with them and try to understand better,” he said.