Three strategies for active management

Managing the market portfolio involves active investment decisions, such as when the fund should buy securities that are due to be included in the benchmark portfolio and whether the fund should participate in initial public offerings. This approach helps secure favourable asset prices and ensures cost-effective management of the fund’s capital.

The fund’s managers also make active investment decisions when fundamental strategies are used to invest in companies. The managers analyse individual issuers of securities, both equities and debt, to find and exploit mispriced assets they expect will generate solid returns over time. This approach relies on knowledge of specific industries and companies. It also delegates investment decisions to individual managers with particular expertise, to foster independent decisions and a diversified investment mix. Most of the fund’s external managers use this strategy.

Active investment decisions are also made in the fund’s management of systematic risk factors. These are common characteristics that securities have to varying degrees and that contribute to both risk and return on different securities. Systematic risk is a key part of the fund’s risk management and can also be a source of excess return through active investment decisions. It is an important variable when explaining an active manager’s results and active management will therefore to a large extent involve risk management. Liquidity and volatility are among the most important systematic risk factors.