AP2, Gothenburg, Sweden, is considering switching half of its 9% actively managed emerging markets equities allocation to a value-weighted alternative beta index, to be managed in-house, said Tomas Franzen, chief investment strategist of the $40 billion fund.
Mr. Franzen said such a move would follow previous shifts for the fund's allocations to Swedish equities and global developed markets equities. Mr. Franzen was speaking in Tokyo on Tuesday on a “smart-beta” panel discussion at Pensions & Investments-Nomura Securities' seventh annual global pension symposium.
AP2's overall allocation to publicly listed equities has dropped over the past decade to just below 50% of its portfolio, and the fund will “continue to try to diversify away from equity risk,” Mr. Franzen said.
Part of that process has involved moving equity allocations to equal-weighted strategies and fundamental indexing, from market-cap-weighted indexes, to take advantage of market anomalies that derive from factors such as behavioral biases, he said.
Mr. Franzen told the conference his team believes it makes sense to use a “well-diversified set of alternative indexes,” as opposed to anointing a single one as a cure to the flaws of market-cap-weighted benchmarks.
He said AP2 first moved a portion of its Swedish equity allocations in 2003 to an equal-weighted benchmark managed by the fund's in-house team. Currently, the fund's 11% allocation to Swedish equities is made up of a 6% allocation to active managers, benchmarked against a market-cap-weighted index; 4% managed against an equal-weight benchmark; and 1% to small-cap equal weight.
Then, about five or six years ago, the fund put 75% of its allocations to global developed markets into alternative indexes. At present, AP2 has a 7% allocation to active managers, benchmarked against a cap-weighted index, together with a 15% allocation to a GDP-weighted index and a 7% allocation to fundamental indexes.
Mr. Franzen said his team is now studying low volatility/minimum variance strategies.
Those non-cap-weighted indexes are an “alternative to active external managers … a more systematic, cheaper way of adding value” to a portfolio, he said.
Overall, the fund's alternative benchmark allocations have “met our expectations … by and large” outperforming market-cap-weighted indexes, Mr. Franzen said.
Still, he conceded market-cap-weighted indexes clearly offer the greatest liquidity. Making sure alternative indexes have sufficient liquidity is important, he said, noting that in one instance AP2 terminated an allocation to a Swedish equity fundamental index when it became apparent transaction costs were eating up too much of the strategy's returns.