Once again, the SKr207.3bn (e22.3bn) fourth Swedish national buffer fund, AP 4, has come under scrutiny for its inability to beat the market and pull in good enough returns. In fact, AP 4, which only turned in 2.4 per cent after costs last year, was the worst performing of the four buffer funds (AP 1, AP 2, AP 3 and AP 4).

The numbers speak for themselves. At only 2.4 per cent, the fund returned roughly half of what the other three AP funds achieved; its active management returned 1 percentage point less than benchmark; and, over the last five years, the picture is equally bleak with active management returning 0.6 percentage points less.

“I’m of course disappointed with our performance,” says Mats Andersson, AP 4’s chief executive officer, who took over a year ago.

In November, AP 4 was harshly criticised by the parliament’s finance committee, following the government’s first five-year evaluation of the AP funds’ performance. The committee expressed deep concern about AP 4’s operative management and encouraged the government to monitor how the fund and its board are being restructured.

The evaluation, conducted by Wassum Investment Consulting, concluded that AP 4 had not reached its target for active management since mid-2001 and that it was unlikely to do so over the next five years.

But AP 4’s Mr Andersson remains optimistic. He says he is now changing the fund’s strategy. He has begun restructuring and has made changes to its staff. Its global sector portfolio has been removed and the fund is now looking for a new head of equities as well as a head of bonds.

The new philosophy also includes a shift from active to passive management, having previously managed almost all asset classes actively. The fund has increased its passive management from 15 per cent to 30 per cent and will continue to do so with the aim of having 90 per cent of its global equity holdings run passively.

“But this is just a temporary measure,” says Mr Andersson. “The next step will be figuring out how we can get back to active management.”

And it seems there is light at the end of the tunnel. The fund’s Swedish equity portfolio, which for years has been its most troublesome, reached its active management target in 2007.

“Our currency and tactical allocation portfolios have also delivered, so there are units that are working,” adds Mr Andersson.

The fund has also reduced its target for active management from 0.5 to 0.4 percentage points, but Mr Andersson emphasises that this has nothing to do with a lower ambition but rather reduced risk.

It is not only AP 4, however, that has failed to reach its active management targets. All four buffer funds were guilty of the above last year. AP 1 was the only one to succeed in beating the benchmark, but still missed its target by 0.1 percentage points.

This failure has added more fuel to the proponents of passive management. Former director of the board at AP 1 and current professor of economics at Stockholm University, Harry Flam, has advocated a 100 per cent switch to passive management for the AP funds. He believes active management is too costly and that its removal could save SKr1bn.

“The funds have opted for a costly model that hasn’t yielded any significant returns – the system needs to be reformed,” Professor Flam said in a discussion paper.

Naturally, the AP funds refute Prof Flam’s assertions. William af Sandeberg, managing director at AP 1, says: “Not everyone can beat the index, but sophisticated managers can. With the right competencies and experience, active management can generate better returns.”

Poul Winslöw, the outgoing chief investment officer at AP 2, agrees and says it is also good for diversification purposes.

Unsurprisingly, fund managers support the AP funds’ defence of active management. Kåre Hahn Michelsen, head of solutions at Danske Capital, admits that although passive management makes sense in some cases, active management has its place.

“We think funds should have a combination of active and passive management, but with a bias towards active. The lesser developed the market, the more it makes sense to manage actively,” he says. But in more efficient markets, such as US large caps, he believes funds probably should not bother.

Mattias Højmark-Jensen, sales manager for northern Europe at BlueBay Asset Management, thinks it is too simplistic to say that active management does not work. He shares Mr Hahn Michelsen’s view that passive management makes sense within more efficient asset classes, and that an active approach is not worth the cost in these areas.

But AP 4’s Mr Andersson is still a believer in active management and has not given up on beating the benchmark – even for a portfolio the size of SKr207.3bn.

“It’s obviously possible and has worked for some,” he says, pointing to AP 1 and the Norwegian government fund as good examples.

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