Folketrygdfondet has a public owner with a long-term perspective, and a clear, strong framework has been established for the management activities. Within the limits set by the mandate, Folketrygdfondet has developed an investment strategy that takes its distinctiveness into account.
The following are characteristics that we take into account when formulating our investment strategy:
- Risk capacity: Folketrygdfondet has a higher risk capacity and greater tolerance for large market fluctuations than many other investors. This allows it to adopt a counter-cyclical, long-term approach. Accordingly, we will often move in the opposite direction of the primary market trend. In other words, we will buy when others sell and vice versa.
- A large investor in markets with occasional weak liquidity: Folketrygdfondet is the largest institutional investor in the Norwegian financial market. For a large market participant, it will often be difficult to trade securities without affecting market prices significantly. This demands a patient, thorough approach to management.
- An interest in responsible investment practice: Folketrygdfondet’s mandate assumes a connection between sustainable development and the opportunity to secure financial returns in the long term. We safeguard our financial interests by exercising our ownership and creditor rights in an active, responsible manner.
- Knowledge about companies: Over time, Folketrygdfondet has become highly familiar with the companies in its portfolio, and has access to extensive information.
The Norwegian and Nordic equity and fixed-income markets are relatively efficient, and we respect the fact that it is difficult to deliver results better than those of the benchmark index (excess returns). Nevertheless, we believe that Folketrygdfondet’s distinctive characteristics provide a strong foundation for generating excess returns over time.
Our investment strategy assumes that Folketrygdfondet will engage in active management. In other words, we may well make investment decisions that depart from the benchmark index, subject to the limits laid down in the mandate. In our view, our distinctive characteristics allow us to generate additional returns over time, at a low cost. However, we have also observed that the Norwegian securities markets have characteristics that render passive management (management close to the benchmark index) of the Government Pension Fund Norway unsuitable and perhaps even impossible.
Being an active manager lends weight to Folketrygdfondet's role as an owner and responsible investor.
How we construct our portfolio
Universe: In Folketrygdfondet’s mandate, the Ministry of Finance has defined what types of securities Folketrygdfondet may invest in and where it may invest (the investment universe).
Strategy: Folketrygdfondet’s size in the Norwegian market means that it is less able than many other investors to enter and exit companies quickly.Accordingly, our investment strategy emphasises finding “good companies”. With this, we mean well-run companies that can be expected to generate returns in the long term.
Qualitative and quantitative criteria: Our managers apply both qualitative and quantitative criteria. We focus on fundamental factors such as macroeconomic assessments, performance trends, equity returns, capital structure, pricing, cash flow and analyses of corporate governance, environmental and social matters.
Active ownership: We follow up on the companies in which we choose to invest through our active ownership.
How we create excess returns
We adapt to new challenges in the markets continually, and constantly develop our investment strategy.
Nevertheless, some primary sources of additional returns can be identified at the strategic level:
- High-quality companies: We search for companies in which we can be invested for a long time.
- Liquidity premiums: We extract liquidity premiums by investing in securities that are less liquid than the benchmark index. We are able to do this because, as a long-term investor, we have less need for short-term liquidity.
- Time-varying risk premiums: We give emphasis to counter-cyclical investments, including beyond what is directly required by the rebalancing requirement in the mandate.
- Diversification gains: We can invest in securities that are not included in the benchmark index.
- Share loans, etc.: We offer share loans and other structural adjustments and services in connection with the portfolio.
Important when assessing additional returns
Folketrygdfondet is engaged in the long-term management of the Government Pension Fund Norway, and excess returns must be assessed over time. Our success in achieving excess returns will vary from quarter to quarter, and we must also be prepared for long periods of somewhat lower returns than the benchmark index. This is a consequence of our size in the markets, our risk profile and our long-term investment strategy.