Over time, AP2 deems that some 90 percent of its return derives entirely from market exposure of its strategic benchmark, the remaining 10 percent being generated through active portfolio management.
The reason AP2 complements direct market exposure with active management derives from its brief to maximize return while maintaining a low level of risk. This strategy is also based on the Fund's perception of how capital markets function and on the potential for generating portfolio returns. This strategy has been formulated in a number of 'Investments Beliefs', These describe the Fund's view of the way capital markets function and the opportunities presented for generating a return on investment. These principles may be grouped under three main headings.
In principle, asset management offers two main ways of generating value. The first is to establish an effective portfolio of asset classes that over time capture the risk premiums available on the financial markets. The second is to practice active management. The latter assumes an ability to locate temporary price inefficiencies, based on the recognition that no market is entirely effective.
There is also fundamental consensus that share values, over time, tend to revert to their mean value and that longterm risk cannot be compared to shortterm risk. Trends the equity market in recent years are a case in point. Portfolio diversification by mixing assets and management strategies is thought to increase overall returns without raising the total level of risk in the Fund's portfolio.
As a long-term investor, AP2 is better able to bear the risk arising from short-term market fluctuations. The Fund's brief also enables investment in a broader range of asset classes compared to other market players. As investor, AP2 is allowed to acquire illiquid assets, diversifying risk while simultaneously offering expectations of a higher return. Furthermore, long-term investment enables investors to practice active governance, to add value to the portfolio.
The Fund must consistently attract, develop and retain competent staff. Exceptional financial competence and investment insight are crucial in enabling active management and in creating value that outperforms passive market returns. Structured and efficient processes are decisive in ensuring that we benefit fully from the specialist competence represented by our staff. A structured approach makes it possible to speedily identify – and act on – new information.