An effective investment policy is embedded in the client’s overarching policy. The ambition level and the existing obligations of the client should be considered the starting point in order to arrive at the desired return and risk considerations for the investment portfolio.
The long-term aspect of pension liabilities is leading and results in the application of a longer-term investment horizon. However, situations may occur in the shorter term that may compromise the longer-term investment horizon. It is therefore vital to deal knowingly and in a balanced manner with the conflicts within the investment policy between the shorter-term underlying conditions and possibilities and the longer-term objectives.
A disciplined investment process, based on clear investment starting points and proper risk management, ensures that decision-making within the entire process chain is more transparent and that process steps can be coordinated and kept in line with the final objectives of the client.
Socially responsible investment
Socially responsible investment can be embedded in the investment processes without this affecting the achievement of the return targets. Moreover, investments can produce satisfactory long-term returns only if society develops in a well-balanced way. It is only appropriate, therefore, to look at the social implications of investment advice and decisions and try to prevent any negative social effects and, where possible, to strive to make a positive contribution to society.
Added value is achieved by focusing on a high level of strategic and operational knowledge within the organisation, as well as exploiting the knowledge present in the broad network of external relations.
Added value can be achieved by investing as an early adopter in markets in the development phase.
MN investment beliefs with regard to portfolio structure:
Long-term value creation
The driver of long-term value creation for an asset class can only be underlying economic activity. Consequently, the strategic asset allocation should mainly include asset classes with underlying economic activity.
For all asset classes, markets are inclined towards similar expected returns, corrected for risk. At a certain point in time, dynamic asset allocation markets try to find a new market balance because of trend reversals that can be identified on the basis of fundamental analysis. Investors can respond in the shorter to medium term by means of dynamic asset allocation.
A more balanced portfolio in terms of return and risk can be achieved by taking the allocation across various risk sources as a starting point. Focusing on achieving diversification across fundamental low-correlated risk premiums, taking into account costs and complexity within the investment portfolio, provides added value.
Liquidity and illiquidity premium
Investors holding long-term illiquid assets will receive an illiquidity premium by way of compensation. The ability to benefit from an illiquidity premium will depend on the investment horizon and investment policy because they determine to a large extent the demands placed on the liquidity of the investment portfolio.
Using economic scenarios within the portfolio construction increases the robustness of the investment portfolio.
MN investment beliefs with regard to products:
Efficient beta implementation
For return and manageability purposes, it is best, at product level, to concentrate on earning the risk premiums specific to the universe of the asset class as efficiently as possible. The guiding principle here is to take calculated and manageable risks that are sufficiently compensated for.
Market efficiency and active management
Inefficiencies do occur within investment markets, but it is extremely difficult on the basis of inefficiencies to achieve above-average returns on a consistent basis. Active management is worthwhile only if the following conditions are met:
- the aim is mitigating portfolio risk or efficient portfolio management;
- the assumed market inefficiency can be used to its advantage by a specific party as a result of demonstrably superior information collection or fundamental analysis capacity.
Product strategies are best created if investment-related knowledge and analysis of the underlying asset class are combined with insight into the final objectives and the corresponding investment portfolio.
Ex-ante risk management
A disciplined process that results in the drafting of specific investment mandates at product level will allow investment risks to be better identified at product level and analysed and mitigated within the defined policy framework.
Optimal implementation at product level should be based on efficient portfolio management, whilst avoiding any unnecessary complexity, improving transparency and explainability, and cost awareness.
Internal and external asset management
The objectives at product level are best achieved by carefully selecting specialist managers according to their expertise, quality, robustness of service, and costs. They may be internal as well as external managers. In-house management can bring added value through a customised approach, lower costs and contributing knowledge when it comes to advising on the investment portfolio. If investments are more specialist and less liquid in nature or bear a higher reputational risk, management by an external party is a more obvious course.