To create the returns necessary to fulfil its mission, the Fund has chosen a management model that is divided into two stages.
The strategic benchmark - the Fund’s most important decision
In the first step, the Board of Directors decides on the Fund’s long-term investment orientation, the strategic benchmark. The chosen composition of the strategic benchmark is the main driver for the Fund’s long-term return. The strategic asset allocation unit is responsible for providing the Board with decision data regarding changes in the strategic benchmark. This unit does not participate in active management.
In the next stage, the strategic benchmark decisions are executed and active investment decisions are made towards the goal of generating a return on net assets exceeding that for the strategic benchmark. Responsibility for producing this excess return has been delegated to five other investments units, whose task is also to ensure that the Fund’s assets are invested in accordance with the chosen strategic benchmark.
Management model
Why active management?
As described in the preceding section, the asset mix in the strategic benchmark has been selected 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.
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.
Management structure
