Long-term investment is often associated with buy and hold strategies which do not budge as markets swing one way or the other. However, a Swedish pension fund takes a very different approach – one that embeds agility into the very fabric of the organisation. This not only helps the fund perform over the long term but also enables it to take advantage of shorter-term market movements, thus maximising its return potential.

As market volatility has become heightened due to macroeconomic and geopolitical uncertainty, it has increased the challenge for pension funds and other institutional investors seeking to generate consistent performance. Against this backdrop, agility – a feature that pension funds have historically struggled with – has become a bigger priority.

Jonas Thulin, CIO at the Third Swedish National Pension Fund (AP3), spoke to CoreData Research to explain how the fund challenges the stereotypical pension fund investment model, showing that even large institutions with long-term horizons can be nimble.

“The long-term perspective is nothing but a stack of short-term perspectives on top of each other,” he says, explaining the fund’s entire model is built around facilitating the need for agility.

In the context of AP3, agility does not mean swing trading, rather it refers to a decentralised governance structure which allows the fund to react to market movements quickly while safeguarding its longer-term commitments.

Breaking down barriers

Thulin explains AP3 does not have committees to take investment decisions. Rather, each head of department manages their own risk budget. “Everybody owns their risk and when people start to see something that’s profitable, others look to see what they can learn from that team,” Thulin says.

This approach allows its fund managers to take and implement investment decisions quickly.

The fund has also eliminated bonuses which, according to Thulin, means people are more willing to share ideas. “Bonus culture encourages people to play their cards close to their chest,” he says. By eliminating incentives which promote secrecy, AP3 is cultivating a culture of transparency, which Thulin believes is fundamental to fostering genuine agility.

He also stresses that strategic and tactical mandates need to be kept separate: “The divide needs to be 100% crystal clear. The two should never mix. If you’re able to set up your asset allocation this way it [being agile] becomes quite easy.” This is because the strategic allocation provides stability while the tactical portion allows the fund managers to move in and out of markets as they see fit, allowing AP3 to capture short-term opportunities while remaining anchored strategically.

The challenge is having a team that is skilled enough to do this well. “You need to hire the smartest people in whichever market you’re working in.” This is not always straightforward and Thulin says many banks and asset managers have become more rigid in the way they train fund managers. To counter this, AP3 is partnering with Swedish universities to nurture new talent and encourage investment thinking that is agile as well as strategic.

Bringing it all together

Given it is composed of teams working independently, could the fund run the risk of making conflicting decisions?

Thulin explains how AP3 works to avoid this: “We look at the tilt in the book every day and see what our underlying exposure is.” Then, as CIO, Thulin carries the final word as he can override or reinforce positions in real time: “I have to be very accountable for whatever I do. If I go against our head of equities, we will know on a tick by tick level whether I’m right or wrong and we can adjust. This makes it a very fluid, very agile organisation.”

Culture fosters agility

AP3 can be considered something of an outlier in an industry where the buy and hold approach has been heralded as a panacea to most investment woes. As markets have become more complex, Thulin feels some asset managers may have been “hiding” behind the long-term investment concept. “Some of the larger asset management firms have begun to shy away from tactical investments because the markets have become too complex and they say they don’t believe in market timing. This actually makes market timing easier for those who have the skill to do it.”

In Thulin’s view, agility is not a luxury, but a necessity. He says pension funds should be looking to generate alpha through agile decision-making – if they do not do this they “may as well stick to buying ETFs”.

The AP3 model shows how an alternative approach to governance and remuneration structures can reshape organisational culture. And it may provide an important lesson for the wider industry at a time when agility is prized.

Angele Spiteri Paris is a senior research consultant at CoreData Group, a global specialist financial services research and strategy consultancy. To find out more about our industry insights and research programmes, you can reach her at [email protected]