Active management - a profitable business

The estimated additional cost for the Fund to conduct active management has been around SEK 100 million annually. This should be seen in relation to the additional contribution of close to SEK 3,750 million, or SEK 1,250 annually, delivered by the Fund.

A subject of almost eternal debate is the question of whether it is worth conducting active management, in other words trying to perform better than the index. Many have maintained that all information is available to everybody at the same time, and that the current pricing of the asset in question is therefore correct. It is claimed that nobody can be better than "the market" over time.

The Fund is a long-term manager that sees an opportunity to conduct active management in the short-term perspective while maintaining a long-term focus, because the Fund works with different investment horizons in the portfolio. Since the beginning, the Fund has advocated active management, and this strategy contributes positively over time.

The violent share price fluctuations and crises of recent years are perhaps arguments to suggest that the market is in fact not "perfect", and that for those with the resources and wisdom, being an active manager pays off.

The next question is, of course, "Is the additional expense incurred by active management justifiable?"

Active management costs more. On that point, the view is unanimous. It is not just a matter of costs for individuals. Active return also requires major investments in systems for following up risk/return, and general administration.

Costs of passive management 

An internal and very rough estimate shows that AP4 could conduct completely passive management, with all assets invested according to a chosen index. This would cost around SEK 100 million annually, of which employee expense amount to 50%. The high level of the cost is attributable to the fact that even passive management requires staffing, administration and monitoring of risk/return.
Where is the additional expense in active management?  The above-mentioned rough estimate indicates that it is mainly attributable to employee benefits expense and system support.

Active earnings of SEK 3,750 million

The estimated additional cost incurred by AP4 in the last few years to conduct active management has been around SEK 100 million annually. This should be seen in relation to the additional contribution of close to SEK 3,750 million, or SEK 1,250 million annually, delivered over the last three-year period.

Looking at the additional risk taken by the fund, which is a prerequisite for active management, that too is acceptable. The active risk in the last three years corresponded to volatility of 0.4% expressed as an annual rate. Seen in relation to the active return, which has generated an annual rate of 0.7%, an information ratio of 1.7 for the period is achieved, which is an exceptionally high figure. For each SEK 1 that the Fund has taken in risk, SEK 1.7 has been created.

All in all, the choice of conducting active management, based on the last three years, is justifiable. At the same time, three years is a short period in which to draw more far-reaching conclusions. For this reason, the Fund continually evaluates performance.

One aspect of active management that receives very little attention is that it enhances possibilities to be a knowledgeable and shrewd owner. As one of the largest owners on the Nasdaq OMX Stockholm exchange, AP4 is often contacted by companies regarding various ownership issues. Performing one's own analysis and establishing a view of the company, which is a prerequisite for active management, increases the chances of responding to the companies' questions wisely and constructively.

Perhaps the conditions for conducting active management have never been better than they are today. As an increasing number choose the passive alternative at a time when return is often evaluated on a quarterly basis, there is an exciting alternative for a manager with AP4's mandate.