Swedish Pension Plan: Alpha-Beta Split = Investment “Creativity”

This month’s alpha-centric “fan-of-the-month” award goes out Tomas Morsing, head of quantitative strategies at the 24 billion Euro Swedish public pension, AP2 (one of several “buffer funds” serving the nation’s citizens).  Morsing addressed the London edition of Terrapinn’s Portable Alpha conference series last week and stole the show, on our opinion, with his pronouncement that alpha-beta separation has injected “creativity” into his management team.

According to Thomson Investment News, Morsing told the crowd:

“There has been a significant change in attitude of our internal team and this split has certainly focused minds and boosted creativity – we have moved from a traditional way of managing money to the introduction of several new ideas…”

“Initially, there was a lot of reluctance from these two teams to relinquish capital because, essentially, they are being told that if they don’t take risk, they will not generate anything for the pension fund…But after a while, they realised that they did not have any responsibility for beta and had complete freedom to chase alpha, without any restrictions…”

AP2’s website contains more on the plan’s alpha-centric credentials, including this chart showing 2006 return contributions from alpha and beta sources:

And the fund’s First Half 2007 Report says:

“To improve prospects of generating a relative return against index, the Second AP Fund introduced a new asset management model, as of January 2007.  The model involves the assignment of portfolio responsibilities to different investment teams – Swedish Management, Global Management, Quantitative Management and External Management.  Portfolio managers within each team will have access to many investment opportunities in several asset classes.  This working approach also establishes a clear distinction between beta investments (return generated through exposure to a specific market) and alpha investments (return generated by outperforming the benchmark portfolio).”

This modular approach makes assembling the fund’s portfolio much more simple and straightforward, alpha is easily transportable, and costs are kept to a minimum.  The trick now is for Morsing to prove he can put it all together with only an Allen key and a Phillips-head screwdriver (without swearing)…

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