Equity investing for the long term. BI Industry Seminar at CAPR 4. november 2014 Nils Bastiansen Executive director equities

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Marcus Gaines
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1 1 Equity investing for the long term BI Industry Seminar at CAPR 4. november 2014 Nils Bastiansen Executive director equities

2 2 Managed by Folketrygdfondet Managed by Norges Bank (NBIM) 183 Bn NOK 147 companies 5478 Bn NOK 8000 companies

3 3 Folketrygdfondet's investments

4 4 Important investor on Oslo Stock Exchange 4,6 % of the stock market 9,9 % of the main index Approx. 3,6 % of the bond market Highest ownership share in a single company: 10,5 %

5 5 Mandate to manage public assets With good returns Within defined risk limits Long-term As a responsible, active owner

6 6 Helping to develop Norwegian businesses Folketrygdfondet contributes by: Providing capital Exercising ownership Supporting well-functioning markets Providing stability to the market

7 7 Good returns over time High excess returns over time, especially since the financial crisis Per

8 8 Returns over time, at the portfolio level

9 9 The Norwegian equity portfolio 10 largest companies Markedsverdi (mill. kroner) Eierandel (prosent) Vekt SPN, norsk aksjeportefølje (prosent) Statoil ,5 21,1 DNB Bank ,5 12,3 Telenor ,3 11,6 Yara International ,3 5,5 Norsk Hydro ,0 4,9 Orkla ,1 4,1 Marine Harvest ,9 3,5 Seadrill ,7 3,2 Gjensidige Forsikring ,0 2,9 Subsea ,8 2,8 Per

10 10 Our investment philosophy - equities Investment profile characterised by high level of risk-awareness Team-based management based on: Solid expertise Access to information Thorough investment analysis Active management and responsible investment practice creates financial value

11 11 Folketrygdfondet's advantage Good framework and mandate Large size Long-term investment horizon Capacity to bear risk Access to information Solid expertise and systematic investment process Ability to act counter-cyclically Responsible investment and active ownership

12 12 Active management strategies Active over/under-weighting at sector and company level Active utilisation of risk limits Opportunistic when risk premiums are favorable Awareness when it comes to choosing the size of deviations from the benchmark (risk/return and probability) Dependent on opportunities present in the market Sector and company analysis to identify uncertainties and opportunities Risk-bearing capacity allows participation in restructuring and recapitalisation processes Use of long-termism to capture liquidity premiums

13 13 How to create excess returns Overweight high-quality companies Which satisfy our investment criteria Underweight companies with unrealistic expectations High levels of uncertainty: Pricing, capital structure, management, operations, strategy, etc. Identify new trends In terms of both business cycles, supply and demand trends, operating frameworks Act counter-cyclically Harvest time-varying risk premiums Increase beta when risk premiums are high, reduce when low Offer liquidity in restructuring processes where the expected returns are good Team-based asset management and expertise

14 14 Relative equity management weighting and deviations Excess returns Under performance Overweight Deviation grows Deviation reduced Underweight Deviation reduced Deviation grows

15 Investment process Universe Strategy Quality Value Norway Nordic (ex-norway) Macroand market outlook Sector evaluation Qualitative company analyses Quantitative company

15 15 Investment process Universe Strategy Quality Value Norway Nordic (ex-norway) Macroand market outlook Sector evaluation Qualitative company analyses Quantitative company analyses Equity portfolio Follow-up Measuring risk Control of limits Calculation of returns Valuation Earnings development Price momentum Profitability Beta Size Liquidity

16 16 In pursuit of the 'good company' We want exposure to what we consider 'good companies' based on certain qualitative and quantiative criteria

17 17 Investment process value Own evaluation Cash flow analysis Pricing multiples Return on equity Results development Capital structure Own valutation vs share price Incorporation of company- and sector specific considerations in the quantitative analyses

18 18 Companies in which we are invested Eierandel inntil 15% Snitt 5%

19 19 Equities: Avoiding over-valued companies and finding quality companies gives outperformance In a 5-year period the annual excess return was 2,63 percentage points Overweighting explains 1,48 pp Underweighting explains 1,15 pp Undervekt 0.23% 0.40% Overvekt Of these, companies we have chosen not to invest in at all contributed 1,08 pp -0.30% -0.10% 0.10% 0.30%

20 20 Clarifying portfolio characteristics Top down: Given the market view, what should the beta be? How can we achieve excess returns? The portfolio should perform better than the benchmark in terms of: Valuation (EV/EBIT, P/E, P/B) Momentum (Share price and earnings) Profitability (ROE, Earnings yield, Dividend yield)

21 Identifying time-varying risk premiums Pricing of OSEBX P/E P/B Dividend yield Earnings yield/5y bond yield

22 22 One rule gave huge gains "A surprisingly simple rule has provided one of the stock exchanges larges investors with huge gains. Folketrygdfondet has made billions by sticking to a fixed allocation between stocks and bonds in its management." Dagens Næringsliv, 21. august 2013

23 23 Our role as an owner: Issues we address: Arenas we use: Board nomination Capital structure/strategy Remuneration Values and guiding principles Dialogue with Board/Management Shareholders Meetings Nominations Committees and Corporate Assemblies Reporting and communication

24 24 We create value for Norway

ODIN Norge. Fund comments October 2013. New all time high for Norwegian shares - more to come

ODIN Norge. Fund comments October 2013. New all time high for Norwegian shares - more to come ODIN Norge Fund comments October 2013 New all time high for Norwegian shares - more to come Great results and new dividends policy give lift to Gjensidige More restrictive investment policies from oil