STOCKHOLM — High correlation among four of Sweden's AP funds — accounting for 421.5 billion krona ($56.9 billion) — is leading to speculation of major asset allocation changes, or possibly even a merger of the four.
A report published by the Swedish Ministry of Finance late last month triggered the merger rumors, as the government is now conducting a review of the entire 577 billion krona AP system, said Crispin Lace, a Watson Wyatt LLP consultant based in Stockholm.
But AP fund executives downplayed the merger rumors and said the key issue raised by the report is getting higher alpha. While the funds' boards have set risk targets of 3% to 5% (as measured by tracking error against the benchmarks), the report found all of the funds to be around 1%.
The search for higher alpha could bring greater opportunities for active money managers, as the funds diversify their portfolios into more specialized investments, including alternatives.
But a merger of the four funds would drastically reduce the number of mandates, hitting the pockets of their external managers. Only five of the 28 managers now used by the funds — Barclays Global Investors Ltd., Capital International Ltd., Nomura Asset Management U.K. Ltd., State Street Global Advisors U.K. Ltd. and Pictet Asset Management, all of London — manage assets for more than one of the three funds for which manager names could be obtained.