Goals and strategiesActive management for higher returns
As described in the preceding section, the asset mix in the strategic benchmark has been chosen on the criterion that it will give the Fund the best prospects of fulfilling its long-term obligations. However, return on the strategic benchmark will vary over time.
In seeking to increase total return and therefore also the probability of meeting its return target, the Fund has chosen to pursue active management. Active management aims to diverge from the composition of the strategic benchmark in order to earn a higher return.
The Fund's goal for active management is to produce an excess return on the total portfolio of at least 0.5 percentage points per annum.
The Fund has adopted a strategy with a large degree of active management on the conviction that is it possible to earn above-index returns in many parts of the global financial markets through advanced research and well diversified risk-taking. To succeed, however, the Fund must have a strong focus on active management, skilled and knowledgeable employees, systematic and well structured investment processes and a high level of cost-efficiency.
Active management is a central part of the Fund’s strategy for creating the return required by the Fund’s mission. The Tactical Asset Allocation unit, one of the Fund’s five internal investment units, reallocate the Fund’s assets between different asset classes and markets on the basis of macroeconomic indicators, fundamental valuation and statistical analysis.
The Fund has chosen to concentrate its active management in areas where managers have historically been able to generate high risk-adjusted active returns. For example, the Fund has identified the equity markets where managers have achieved the strongest and weakest active returns.
Among other things, these findings have indicated the difficulty of creating active returns in management of US small caps, but better scope to earn an active return in management of US large caps.
This research also shows that active foreign exchange management and asset allocation have produced a high risk-adjusted return.
Internal or external management
One critical consideration is to what extent, and in what areas, the Fund's active management should be performed by its own staff or by an external party. For active asset management, the decision is determined by the individual manager's ability to generate a good risk-adjusted return after expenses.
- Active management 79%
- Enhanced management 18%
- Passive management 3%