Key Takeaways
- • Björn Kvarnskog, formerly head of global equities at Swedish pension fund AP4 ($55 billion), has led a complete review of the Future Fund's $30 billion equities portfolio since moving to Melbourne about 20 months earlier.
- • The Future Fund recalibrated its equities portfolio into separate active and passive mandates, with managers carrying more active risk required to generate alpha.
- • The portfolio now sits largely in beta and alternative-beta mandates, while high-risk alpha mandates, mostly market-neutral hedge funds, complement them.
- • The fund moved away from large hedge fund mandates, including a $2.5 billion equity long-short mandate, toward smaller, earlier-stage stockpicking managers with better terms and transparency.
- • Replicating long-only strategies that charge 30-60 basis points costs the fund a fraction of one basis point, which Kvarnskog says has saved significant money on fees.
Summary
Björn Kvarnskog moved from Stockholm to Melbourne roughly 20 months before his September 2017 interview to become head of equities at the Future Fund, after serving as head of global equities at AP4, a $55 billion Swedish pension fund. Hired by chief investment officer Raphael Arndt with an open mandate to assess the equities portfolio's strengths and weaknesses, Kvarnskog conducted a full review of the Future Fund's $30 billion equities book. He discussed the findings publicly for the first time at the 2017 Investment Magazine Equities Summit in Melbourne on September 12.
Kvarnskog said the listed equities program had performed well but could do better. The review found substantial unintended factor risk, partly because multiple long-only managers added over time had diluted tracking error, and momentum exposure in the long-short portfolio was significant. Working with the board and investment committee, the team set a new objective: take as much desired risk as possible and play a role in portfolio completion. The equities team now targets factor exposures more deliberately, reduced its momentum exposure, and focuses on factors such as value and quality, while considering total-portfolio factor risk across fixed income and private equity.
The restructured portfolio is divided into sub-categories with distinct objectives. Kvarnskog described it as "almost a barbell approach": most assets are in beta and alternative-beta mandates designed to capture market or alternative risk premia, while high-risk alpha mandates, with a preference for market-neutral hedge funds, sit alongside them. The fund has shifted from large hedge fund mandates, including a $2.5 billion equity long-short mandate, toward smaller, nimbler stockpicking managers at earlier stages of their lifecycle, which Kvarnskog said brings better terms, conditions and transparency.
The overhaul also addressed fees. According to Kvarnskog, the fund can replicate a long-only strategy that charges 30-60 basis points while paying a fraction of one basis point, and he said the fund has saved considerably as a result. He stressed that the fund will pay for skill and idiosyncratic risk management, but not for long-only managers riding factors over many years.
Kvarnskog said the listed equities program had performed well but could do better. The review found substantial unintended factor risk, partly because multiple long-only managers added over time had diluted tracking error, and momentum exposure in the long-short portfolio was significant. Working with the board and investment committee, the team set a new objective: take as much desired risk as possible and play a role in portfolio completion. The equities team now targets factor exposures more deliberately, reduced its momentum exposure, and focuses on factors such as value and quality, while considering total-portfolio factor risk across fixed income and private equity.
The restructured portfolio is divided into sub-categories with distinct objectives. Kvarnskog described it as "almost a barbell approach": most assets are in beta and alternative-beta mandates designed to capture market or alternative risk premia, while high-risk alpha mandates, with a preference for market-neutral hedge funds, sit alongside them. The fund has shifted from large hedge fund mandates, including a $2.5 billion equity long-short mandate, toward smaller, nimbler stockpicking managers at earlier stages of their lifecycle, which Kvarnskog said brings better terms, conditions and transparency.
The overhaul also addressed fees. According to Kvarnskog, the fund can replicate a long-only strategy that charges 30-60 basis points while paying a fraction of one basis point, and he said the fund has saved considerably as a result. He stressed that the fund will pay for skill and idiosyncratic risk management, but not for long-only managers riding factors over many years.
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