Discussion notes

A Discussion Note on the market for investments in syndicated loans.

In this note we survey the academic literature and provide empirical evidence related to the carry trade in foreign exchange markets.

In this note we present a review of construction practices and performance of global equity benchmarks from the perspective of a large long-term global asset owner.

In this note, we survey the academic literature and provide empirical evidence related to time-series momentum strategies in the futures markets. We find that this phenomenon is remarkably consistent across 47 diverse futures contracts in our study, and it has led some to consider time-series momentum an asset pricing anomaly.

In this note we look closer at infrastructure investments. Our objective is to provide an overview of the opportunity set, key risks and return drivers.

In this note we review the rapidly expanding literature in the area of market microstructure, high frequency and computer-based trading. On the back of this and based on our own investment and trading experiences, we highlight issues of concern to large long-term global investors.

In this note, we review the theory and empirical evidence of the value effect. The value effect is the excess return that a portfolio of value stocks (stocks with a low market value relative to fundamentals) has, on average, earned over a portfolio of growth stocks (stocks with a high market value relative to fundamentals). We will focus our attention in this note on the existence of a value effect in equity markets.

From a risk management perspective, tail risks and return distribution asymmetries of investments are important to analyse. In this note, we describe a modelling approach that addresses some of the weaknesses of standard risk models.

In this discussion note, NBIM’s expectations on corporate governance are presented. Expectations directed at boards are discussed, as is the rationale for focusing on board ccountability and equal treatment of shareholders. In the discussion, the academic literature underpinning NBIM’s approach to corporate governance and opinions offered by leading industry ractitioners are presented. Two sets of expectations are included as appendices that conclude the note.

In this note we discuss the theoretical foundation for well-functioning financial markets and why well-functioning financial markets are essential to reach the objective for the management of the Fund. Against this background we discuss, how NBIM may work to influence how the markets we invest in function.

The small-firm effect (SFE) refers to the long-term average excess returns that a portfolio of small-capitalisation stocks earns over a portfolio of large-capitalisation stocks. In this note, we review the extensive empirical evidence on the SFE and the various theoretical explanations that researchers have put forward for the effect.

Shareholders receive return on their invested equity only after the company has ensured the fulfilment of obligations to all other parties. Shareholders are therefore rightly given prerogatives to influence the company, through the approval of certain corporate decisions including, not least, the appointing of the board. This note provides a brief overview of board appointment practices in 10 equity markets. It does not seek or claim to give a full description of all relevant aspects or considerations.

Inflation-linked bonds are fixed-income securities whose principal and coupons are linked to price indices. They are designed to eliminate the risk of unexpected inflation to the holders of the bonds. In this discussion note, we compare the risks and rewards of inflation-linked bonds with those of nominal fixed-income securities. We also evaluate the role of index-linked bonds in diversified portfolios.

We describe the market structure of global inflation-linked bonds to evaluate to what degree they constitute an investable and homogeneous asset class. In particular, we discuss the market's growth, size and composition relative to nominal bonds. We also pay attention to the design of inflation-linked securities across countries and market-specific demand and supply factors.

This note illustrates the empirical risk/return characteristics of the different risk premia, and how one can design scalable investment strategies to capture systematic risk premia.

We study alternative portfolio construction methods in an attempt to improve the return-to-risk characteristics of market value weights. To understand the investability of these approaches we introduce a novel way to measure the investment capacity of a portfolio relative to the market-valueweighted index.

We survey the literature on the risks and rewards in emerging equity markets. Drawing on theoretical and empirical arguments, we assess whether a long-term investor should have a strategic allocation to these markets that deviates substantially from the market capitalisation weights.

We study the links between economic growth and equity market returns to evaluate whether structural changes to global growth composition have implications for longer-term strategic allocations. In particular, we assess whether the projected rise in emerging markets’ share of the world economy warrants an allocation to emerging asset markets that deviates from market weights.

In this note we dig deeper into the rebalancing question and examine how the Fund’s rebalancing rules have impacted overall risks and returns.

We review the theoretical foundation for rebalancing regimes and look at the impact of rebalancing on the portfolio’s risk and return based on historical return data from 1970 to 2011. We compare both different calendar based rebalancing regimes and different threshold based regimes with the performance of a drifting mix portfolio. Towards the end of the note we focus on the specific design of a rebalancing regime. In particular, we look at a trigger based regime and examine different designs of the threshold level, persistence requirement and implementation rule.

We review the academic literature on the empirical phenomenon of return predictability and discuss its implications for the rebalancing policy of longterm investors.

What is the optimal rebalancing policy for a portfolio’s equity and bond holdings? The classical answer, building on the seminal contributions by Mossin (1968), Merton (1969, 1971), Samuelson (1969) and others, is that investors should hold a constant proportion of bonds and equities in their portfolios. During the 1980s and 1990s, empirical and theoretical research began to challenge the fundamental premises for this result.

Government debt has increased sharply in most developed countries in the wake of the financial crisis. The increased debt burden comes on top of an expected surge in debt due to demographics. Sharpened by the European peripheral debt crisis, this has led to increased focus on the risk associated with investing in government debt. This section reviews measures of this risk and discusses possible implications for investment returns.

In this section, we review the theory and empirical evidence of the term premium. The term premium is the excess return that an investor obtains in equilibrium from committing to hold a long-term bond instead of a series of shorter-term bonds.

In this section, we review the theory and empirical evidence of the credit premium. The credit premium is the excess return that an investor obtains for holding bonds issued by entities other than governments. A natural starting point for this objective is to discuss the so-called “credit spread puzzle” and different attempts to resolve it.

In this section, we discuss the potential long-term real return implications of current yield levels in developed economies’ government bond markets. Treasury yields in the major economies are at or very close to their historical lows. Forward-looking measures of real yields based on inflation-indexed bonds or on surveys of long-term inflation expectations are depressed.

This section provides a brief introduction to modern financial economics and theories of discount factor variation