How we manage our money: Oslo Pensjonsforsikring | Interviews


Oslo Pensjonsforsikring (OPF), the city of Oslo employee pension fund, sold all of its oil and gas exposures before 2015. At the time, this might have seemed unusual in an oil-producing country like Norway .

Such a bold and decisive decision was not taken for environmental reasons alone. OPF sold its assets to companies in the oil and gas sector because their cost of capital was deemed very low at a time when the price of oil was $ 100 a barrel. The fund saw this asymmetry as a sign that the industry was heading for an unsustainable future.

As an asset owner focused on long-term goals, OPF seeks to maximize its “break-even” cost of capital, according to CIO Lars Haram. This is one of the pillars of OPF’s strategy.

“We are often torn apart by the long term implication of free money. For us, it has become increasingly important to assess the underlying cost of capital that companies and projects use for their investment and investment decisions. The cost of capital has always been a very important tool because it prioritizes capital over the most profitable ideas. But after a long period of zero interest, this prioritization process has weakened. We often see asymmetric prices between companies and their underlying projects, ”says Haram.

The CIO points to renewable wind projects with an expected return of 3% over a 20-year horizon. “We don’t think such a cost of capital is sustainable when we expect the whole industry to change over the same time period. At the same time, we see industrial projects with a less green profile carrying a cost of capital of 15%. Often these projects are important for the transition to carbon neutrality, but the starting point is not very green. The risk is high, but the balance between long term risk and reward is much better, ”he says.

With NOK 122.4 billion (€ 12.6 billion) in assets under management, OPF ranks fourth among retirement investors in Norway, according to the IPE Top 1000 ranking. The fund is 100% owned by the city of Oslo and manages pensions for over 200,000 people.

Haram joined us in February 2019 after a 12-year career at Storebrand, where he held the positions of Group CIO and CIO for life insurance.

The focus on long-term returns means that, unlike many of its peers, OPF has abandoned dynamic rebalancing strategies in its risk management. Among pension mutuals like OPF, approaches such as constant proportion portfolio insurance (CPPI) are commonly used, but OPF considers that some of the recent market developments make these approaches less valid in the long term.

Haram says these developments are driving OPF towards an opportunity cost model instead. He says: “Long-term regulation, such as Solvency II, the rating spread, with companies privately held longer and the Paris Agreement, pushing capital towards low-cost projects are just as important. reasons to reassess ICPP and other dynamic strategies. . “

The proposed changes to the Solvency II framework, with respect to volatility (VA) adjustments and interest rate pressures, in particular, will make it more difficult to implement a coherent CPPI-like strategy that maximizes returns. Risk-adjusted returns or maximizes the efficiency of capital in your portfolio, according to Haram.

Oslo Pensjonsforsikring at a glance

“Rising interest rate pressure reduces the CPPI cushion in the first place and an improvement in VA will support the countercyclicality. An investor who manages his assets using the CPPI will have to bridge a huge gap between the different dynamics between Solvency II capital requirements and their day-to-day risk management, ”says Haram.

“After a bull market, your CPPI would suggest the highest possible allocation to stocks, but the capital charge would likely be extreme in that case. That is, the allocation would increase your solvency ratio. And vice versa, after a bear market, the CPPI would suggest selling stocks, while the solvency framework argues the opposite. Thus, the CPPI strategy will maximize the cost of holding equity over time and ensure a significantly lower return on regulatory capital than other less cyclical strategies. “

Furthermore, in recent years, life insurers have increased their allocation to both private markets and passive strategies, which does not bode well for dynamic risk management strategies like CPPI.

“Private markets are illiquid and public market noise could be more prominent in the future. While allocating to illiquid strategies makes it harder to reduce risk, the liquid market is more concentrated and volatile, making CPPI triggers more frequent unless you accept more spread risk, ”he says. worth Haram.

“One solution is of course to avoid illiquid markets. But there are good reasons to invest in the private markets. After the introduction of the new Basel framework, European banks deleveraged their non-core businesses and private debt markets exploded. Now, private equity firms, infrastructure projects or commercial real estate depend on debt financing in addition to banks, ”he adds.

Haram goes further in his critique of traditional risk management tools, saying they are not very well suited for capturing climate risk or tackling increased exposure to green technologies, a major undertaking that the EU hopes the life insurers will fund.

“To be able to be an effective investor in the transition, we will need to be more proactive than reactive in risk management. That’s why we spend more time assessing the ‘opportunity cost’ rather than rules-based rebalancing, ”he says.

The opportunity cost model is used by large institutional investors, such as the Canada Pension Plan (CPP) and New Zealand Super, and was proposed by Norges Bank Investment Management (NBIM) in 2014.

“The key is to use a market portfolio as a benchmark for the level of risk, but to invest more widely in real estate, projects and illiquid assets to take advantage of the long-term investment horizon. This approach differs quite significantly from passive investing or the strict daily rebalancing used in traditional ALM strategies, ”says Haram.

The OPF has allocation limits which can trigger a counter-cyclical rebalancing. These limits are quite high and it would take a much larger fall in the markets than, say, last year to trigger a forced rebalancing. In addition, OPF has VaR and Solvency II limits which are calibrated so that OPF is not a forced seller after a significant drop.

“Most of our ongoing daily rebalances are based on maximizing long-term risk-adjusted return, focusing on three areas on an ongoing basis,” explains the CIO.

First, the OPF minimizes the risk of inflation through an allocation to what Haram calls “true real assets”.

He says: “We are looking to have a portfolio that will be robust even if long rates and / or inflation rise. I say “real real assets” because we see a ton of companies that are priced more like nominal bonds than real assets. “

Particularly among green assets, but also within growth-oriented tech companies, Haram sees multiples that can only be defended in a very small subset of many possible market scenarios. “If interest rates rise, we expect these companies to be negatively impacted because so much of their projected cash flow is far into the future,” he notes.

Extreme asset flows to ETFs and passive strategies, combined with lower rated companies, mean that a lot of capital is supporting even less companies. OPF tends to dislike this grouping as it reduces dispersion in the market, preferring instead to screen out investments from larger companies.

“When we invest in large companies, we tend to be an investor focused on cash flow and like companies with pricing power. This means that we might miss out on the newest and the best, but at the same time, we ensure less interest rate dependence in our equity portfolio in addition to having a relatively modest duration in our rate portfolio. nominal interest, ”Haram said.

Second, the OPF balances the “opportunity cost” against the liquidity premium. The market reacts with volatility and speed in both directions. This is partly due to the huge amount of money in risky assets, but also because interest rates are low and governments are ready to support markets through fiscal and monetary policies.

“For us, the cost of not being able to allocate capital to riskier assets during extreme events represents a significant alternative cost to the liquidity premium and must be taken into account regularly when assessing the liquidity. ‘allocation. This is the complete opposite of a CPPI strategy. So we tend to be more willing to hold cash after a long bullish period, ”says Haram.

“The main thing is to use a market portfolio as a benchmark for the level of risk, but to invest more widely in real estate, projects and illiquid assets to take advantage of the long-term investment horizon”

The latest example is the first half of 2020. Haram recalls: “The liquidity premium in the market was very low in January and the VIX index was around 10%. The risk premium was distorted. The increase was less than the potential decrease. The opportunity cost was significant in relation to both our portfolio and our history. We took this opportunity to hold more cash as we felt the marginal value of risk was low relative to the likelihood of a market correction or extreme event. “

This meant that OPF reduced its exposure to equities and high yield in January, although it had no idea how the pandemic would develop. But at no time was this part of OPF’s analysis. “However, when the crisis hit, we had the liquidity and the risk capacity to reinvest in riskier assets, and we did,” says Haram.

Last but not least, OPF focuses on the breakeven point of capital, assessing what it should be for its issuers and managing the portfolio accordingly.

The overall strategy boils down to OPF’s main objective: to generate long-term risk-adjusted returns.

“The core of our risk strategy is the ability to avoid being shut down in situations like 2020. Since we do not use CPPI strategies or a strict rules-based approach to short-term rebalancing , we don’t have to rebalance the risk in the portfolio unless our solvency ratio falls below a certain level, ”concludes Haram.


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