The method adopted to define FDC's initial strategy was based on the general objective of optimising investments and return depending on certain factors, including the investment horizon, liquidity requirements, risk tolerance as well as a minimum target return.
The financial balance of the general pension insurance scheme and consequently of the financial reserve to be managed by FDC depends mainly on macroeconomic factors. The main risk of a financial imbalance is a slowdown in the growth of the labour force or even a decline in the same. The return on FDC’s investments has therefore only a secondary influence on the financial balance and any future deficit could never be fully financed by the returns of the investments made.
The method adopted to define FDC's initial strategy was therefore based on the general objective of optimising investments and return depending on certain factors, including the investment horizon and liquidity requirements, risk tolerance and a minimum target return to be achieved.
As the general pension insurance scheme still has a surplus of contributions over benefits, FDC's assets do not have to contribute to the immediate financing of pension benefits. As a result, FDC does not face high liquidity needs and its investment horizon can be described as long-term.
In terms of investment strategy, a long-term investment horizon allows FDC to withstand, or even go against, short-term market volatility.
Balanced and disciplined risk-taking
Balanced and disciplined risk-taking is necessary in order to generate returns. Risk taking must be responsible, well-proportioned and measurable. To define the strategic risk budget, FDC relies on the Value at Risk metric, expressed as a percentage of invested capital. This approach, widely applied in the financial industry, allows the definition of a maximum loss threshold that should not be exceeded with a defined probability over a certain time horizon.
FDC's investment strategy was defined on the basis of a maximum Value-at-Risk of 20% over a one-year time horizon and a confidence interval of 99%.
A well-diversified portfolio generates better risk-adjusted returns over time.
FDC's investment strategy involves investing in various asset classes managed according to different management styles and spread across a wide range of regions, countries, sectors and currencies.
Minimum target return
The investment strategy must allow to generate a minimum return. FDC’s minimum target return was chosen to at least compensate for the impact of real wage growth and the inflation rate on the level of the general pension insurance scheme's reserve and for the costs of managing the invested capital.
Therefore, FDC's investment strategy provides for an average annual minimum target return of 3.3%.
Active management is based on the assumption that there are inefficiencies in the markets and consequently in the valuation of a number of assets. By identifying these inefficiencies, active management can increase returns compared to indexed management.
FDC's investment strategy foresees an equal split between active and indexed management.
Structured and efficent process and organisation
A robust organisation, a definition of competencies and the implementation of powerful planning and monitoring tools ensure structured and prudent decision-making while providing clear and unambiguous management information to the governing bodies for defining investment strategy requirements, managing and controlling risks and monitoring the achievement of objectives.
At a strategic level, FDC has formalised a control and monitoring concept, an information concept and a rebalancing concept, among others.