Equity investing for the long term

BI Industry Seminar at CAPR 4. november 2014

Nils Bastiansen – Executive director equities

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183 Bn NOK

147 companies

5478 Bn NOK

8000 companies

Managed by

Norges Bank (NBIM)

Managed by

Folketrygdfondet

Folketrygdfondet's investments

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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 %

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Mandate to manage public assets

With good returns

Within defined risk limits

Long-term

As a responsible, active owner

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Helping to develop Norwegian businesses

Folketrygdfondet contributes by:

– Providing capital

– Exercising ownership

– Supporting well-functioning markets

– Providing stability to the market

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Good returns over time

High excess returns over time, especially since the financial crisis

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Per 30.06.2014

Returns over time, at the portfolio level

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The Norwegian equity portfolio 10 largest companies

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Markedsverdi

(mill. kroner)

Eierandel

(prosent)

Vekt SPN,

norsk

aksjeportefølje

(prosent)

Statoil 20 769 3,5 21,1

DNB Bank 11 905 6,5 12,3

Telenor 11 166 5,3 11,6

Yara International 5 353 6,3 5,5

Norsk Hydro 4 731 7,0 4,9

Orkla 3 976 7,1 4,1

Marine Harvest 3 385 9,9 3,5

Seadrill 3 111 2,7 3,2

Gjensidige Forsikring 2 773 5,0 2,9

Subsea 7 2 740 6,8 2,8

Per 30.06.14

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

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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

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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

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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

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Relative equity management – weighting and

deviations

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Excess returns

Deviation grows Deviation reduced

Deviation grows

Under performance

Overweight

Underweight

Deviation reduced

Investment process

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Valuation Earnings

development

Price

momentum Profitability

Beta

Size

Liquidity

Equity portfolio

Universe Quality Value

Follow-up

Strategy

• Norway

• Nordic (ex-Norway)

• Macro-

and market

outlook

• Sector evaluation

• Qualitative company

analyses

• Measuring risk

• Control of limits

• Calculation of returns

• Quantitative

company analyses

In pursuit of the 'good company'

We want exposure to what we consider 'good companies'

– based on certain qualitative and quantiative criteria

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Investment process – value

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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

Companies in which we are invested

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Eierandel inntil

15%

Snitt 5%

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

– Of these, companies we have chosen not to invest in at all contributed 1,08 pp

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0.23%

0.40%

-0.30% -0.10% 0.10% 0.30%

Undervekt

Overvekt

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)

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Identifying time-varying risk premiums Pricing of OSEBX

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02468

1012141618

P/E

0

0.5

1

1.5

2

2.5

3

P/B

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Dividend yield

-1

0

1

2

3

4

5

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01.01.2002

01.08.2002

01.03.2003

01.10.2003

01.05.2004

01.12.2004

01.07.2005

01.02.2006

01.09.2006

01.04.2007

01.11.2007

01.06.2008

01.01.2009

01.08.2009

01.03.2010

01.10.2010

01.05.2011

01.12.2011

01.07.2012

01.02.2013

01.09.2013

Earnings yield/5Y bond yield

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

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Our role as an owner:

Issues we address:

Board nomination

Capital structure/strategy

Remuneration

Values and

guiding principles

Reporting and

communication

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Arenas we use:

Dialogue with

Board/Management

Shareholders Meetings

Nominations Committees and

Corporate Assemblies

We create value for Norway

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