OrganizationBusiness support and risk management
Efficient and smoothly functioning financial administration is critical for reliable reporting, performance measurement and risk management. The Fund's internal investment units carry out a vast number of business transactions every year.
The financial administration unit ensures that each individual transaction is registered and correctly reported and that all trades are properly settled, i.e. that payment is made upon delivery. The unit is also responsible for daily management of static data for a very large number of securities/derivative contracts.
For some of the external management mandates, basic reporting has been outsourced to the Fund's custodian bank. This has led to efficiency gains primarily in the Fund's units for financial administration and performance measurement. In 2008, basic reporting for additional external mandates will be transferred to the custodian bank.
One of the Fund's units, which is independent from the investment units, has special responsibility for valuation of Första AP-fonden's portfolio. In the autumn of 2007 the unit reviewed the applied valuation principles, price profiles and price controls in order to assure the quality of valuation.
The Fund's six units for business support and risk management are independent from the investment units. One of these units has special responsibility for valuation of the Fund's portfolio and performance measurement of investment operations.
This unit is also responsible for reporting of returns and portfolio results, supplemented with performance-related key ratios. Reporting is carried out on a daily, weekly and monthly basis. Much of the research is focused on reconciling the discrepancy between the Fund and benchmark returns, known as attribution analysis.
For several years the Fund has worked according to methods that continuously enhance the asset managers' position awareness. The Fund's investment process relies on access to high quality data (prices, holdings, index, etc.), since precise position data is used in several quantitative models.
Asset management is associated with risks of both a financial and operating nature. A critical factor for successful asset management is therefore the ability to identify, analyze and manage these risks. By having access to all transactions, via its own or the custodian bank's system, the Fund can perform its own evaluation and risk control of all managers.
The ability to identify, analyze and manage both financial and operating risks is a critical factor for successful asset management. Responsibility for monitoring and reporting all risks lies with the risk management unit and the Fund's Compliance Officer.
Financial risks arise due to uncertainties associated with the future value of the portfolio. These consist of fluctuations in asset values arising as a result of changes in market prices, known as market risk, and how well the Fund's counterparties meet their obligations, termed counterparty risk.
The Fund's absolute risk is governed by market risk in the portfolio. This risk is related to the composition of the strategic benchmark and the positions taken in active management, but also the general level of volatility in the capital markets.
Absolute risk in the Fund's listed portfolio at year-end 2007 was 7.9%. Active risk for the same portfolio averaged at 0.6% during the year. The Fund's choice of strategic benchmark is therefore the key determinant for the Fund's total risk.
Risks in active management are expressed in terms of deviation from the strategic benchmark, known as tracking error. The Fund's Board of Directors has established a risk limit of 3% for tracking error at the total portfolio level. Active risk is allocated between different mandates through the Fund's risk budgeting process.
Control, monitoring and management of active risk-taking in asset management are carried out in respect of both ex ante and ex post risks. The unit also monitors position-taking which otherwise deviates from the strategic benchmark. This monitoring is basically performed in real time with the aid of proprietary and external financial systems support.
Counterparty risk can be divided into settlement and credit risk.
Settlement risk arises in that buying/selling of securities does not take place with immediate delivery. Consequently, there is a risk that a counterparty will default on its obligations, for example due to insolvency. The Fund minimizes this risk by entering into contracts only with monitored and approved counterparties with good credit ratings and contractual provisions allowing the Fund to net positions.
The majority of the Fund's cross-currency transactions are paid via CLS bank (Continuous Linked Settlement) as a means for reducing settlement risk since CLS bank offers netting of positions in a number of currencies.
Credit risk is the potential loss to the Fund in the event that a counterparty is unable to meet its financial obligations. The Fund has guidelines to regulate the risks permitted in asset management. Among other things, investments may be made only in bonds classified as Investment Grade, i.e. a minimum rating of BBB- according to Standard & Poor's.
Operating risks are the risks of losses arising as a consequence of human factors, inadequate inadequate systems, inefficient routines and instructions and insufficient control. Effective IT support is therefore critical.
The Fund's large transaction flows are handled in a financial system, Dimension, whose functionality and availability is deemed high. However, this system is not adequate for risk monitoring and has been supplemented with both proprietary and other external systems.
Första AP-fonden's internal investment processes generate a large number of transactions. To minimize operating risks, the Fund continuously upgrades and updates its systems and routines. On a regular basis, the Fund conducts large-scale review of operating risks in which all units participate.
The Fund's Risk Management unit is responsible for identifying, measuring, controlling and reporting all risks. The unit is headed by the Fund's Compliance Officer, who executes risk control and is charged with monitoring compliance with laws and the executive decisions of the Board and Managing Director.