NRPN: One of the main changes last year was in internal portfolio management, to include short selling. Why did you make that decision and what do you expect it to contribute to long-term returns?

KK: This involved a complete separation of alpha and beta. We did this several years ago on the fixed income side. In equity management, the most important issue is to get the financing costs down. We have implemented quite advanced projects to get the best possible utilisation of our physical assets. All assets are managed in a financing portfolio. By structuring the assets this way, we do not have a competition for assets. If you have teams that are very good in one sector, and we already have external managers with mandates in that area, we can still create the internal mandates – as long-short mandates.

NRPN: What is the scope of this internal activity?

KK: In addition to creating the alpha-beta split, we get the flexibility to carve out those parts of the investment universe where we have teams and people with special skills and set the appropriate benchmarks. The benchmarks can be constructed in many different ways. We have systems on top of this to manage the risk to ensure that every benchmark we have adds up to the one we are measured against. So you will have all degrees of freedom. If you want to short against an index, you can do that; if you want to short against other companies you can do that.

NRPN: The finance ministry sets your asset allocation bands but you are very close to the median for equities, bonds and other asset classes. Why is this?

KK: Looking at the excess return of 1.1 per cent last year and the 0.5 percentage points consistent track record, you will see that being close to the median does not say very much about the level of active management. We prefer to conduct active management at the security level without taking many top-down macro-based decisions. We follow the fundamental law of active management and avoid single large positions that can have a huge impact on our performance. We prefer to have as many independent positions as possible. This creates a very high information ratio and we will not change our strategy into being a macro-based tactical allocation company because of the experience and success we have had with this strategy.

NRPN: The finance ministry sets a strict cost benchmark of 10 basis points per year. Will the increasing use of specialist managers mean that this comes under pressure?

KK: This is a challenge because of the cost of good alpha products. You have to be willing to pay the correct price for very good performance and we are willing to do that. We are not willing to pay a high price for a beta product or bad performance but are willing to pay the price for good performance. We feel that the limit is comfortable.

NRPN: Do you think that fixed income can perform well given the economic climate?

KK: I am cautious about forecasts but you could go back two to three years and say there was no more potential in the fixed-income portfolio and that was wrong. It is how you look at the total world economy with huge production capacity and a low-inflation environment. You can have a macro scenario with low inflation but on the other hand we avoid building big single positions based on macro assumptions.

NRPN: At some point the government pension fund may be paying out liabilities. Should you construct your portfolios to take account of that?

KK: This is probably very far into the future. If you look at the system, it will pay a real return calculated at 4 per cent but there will be many years during which we can expect inflows into the fund from oil revenue to be higher than that of real returns. Going into that period I think we will have no challenge. To have an endowment paying a four per cent real return does not mean you have to structure the portfolio on a non-liquid long-term basis.

NRPN: As specialist and the head of the portfolio management side, should you press the finance ministry or parliament to make changes to your investment mandate?

KK: Norges Bank writes letters to the Ministry of Finance when we see arguments for changes in the funds investment strategy. We are asked to advise on strategy and the board of the bank sometimes takes decisions based on formal letters to the ministry of finance and you can find all those letters in the national budget. It is all very transparent. Then the ministry of finance reacts and gives its comments and makes its decisions, and also uses second opinion advice. The main questions are also put to Parliament. If a strategy is not optimal, we see it as our obligation to contact the finance ministry.

Printer friendly version

Email this article to a friend