There has been a lot of focus in the financial press on how active the so-called active funds have been, often measured by the active share parameter. Several large funds have been criticized for having a portfolio that is too close to the index. We believe strongly that if a fund is marketed as an active fund it should be truly active and not a “closet” index fund. Therefore, we do not focus on which shares have high weights in the different indices, and our portfolio will typically have large deviations from index and a high active share. We do not focus on how the index performs either, since our goal is not to outperform a given index. We have an absolute return approach. Our goal is nothing else than to deliver the highest possible risk-adjusted return to our investors over time.
We have an all-cap strategy, which means we can invest in small, mid-sized and large companies. However, we favor small and mid-sized companies because we think the best odds for finding good investments are among such companies. There are several reasons for that: These companies are less covered by the sell-side; large funds often cannot invest in these companies due to fund size-issues; it is often easier to get meetings with senior management; and these companies are often less complex and more focused than large conglomerates. We have a flexible strategy and can therefore harvest the opportunities we see among mid-sized and small companies.
Empirical evidence has also shown that quality companies outperform the market over time. Therefore, we tend to focus our search for quality companies. Quality companies have strong balance sheets (low debt), a track record of delivering high returns to shareholders, and are in industries with high barriers to entry and good future prospects. We continuously search for and monitor such companies, and will invest in these when they are priced moderately or cheap.
Value investing and fundamental research
Value investing means to invest with a disciplined focus on how the investments are valued vs. underlying earnings, cash flows and assets, and only investing when the investments are valued cheap or moderate. There is solid empirical evidence that value investing has been the best way of managing money over time. Therefore, we invest according to this investment philosophy. In practice this implies a strong focus on fundamental analysis and valuation (i.e. not overpaying for assets).
We believe that we, as capital allocators, have a social responsibility to make sure that we are not funding unethical or unsustainable businesses. Therefore, as part of our investment process we consider environmental, social and governance factors. In addition we follow other investors we consider best in class within this area, e.g. Norges Bank Investment Management’s exclusion list.
We are also a member of Norwegian Forum for Responsible and Sustainable Investment, Norsif and Signatory to United Nations Principles for Responsible Investment, UN PRI.