Market

2017 was a very strong year for global equity markets, which were up 22.4% (MSCI World USD), posting positive returns every month of the year. Except for the French election in April/May, there were few geopolitical events which stressed the market. Macroeconomic data continued to be strong, and the market’s perception shifted to the view that we are in a synchronized, global growth period. Even worries about a hard landing in China were dampened, and the Chinese equity markets returned 54% for the year.

It was a particularly good year for technology stocks. The Nasdaq index returned 29.6%, led by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), but were outpaced by the Chinese companies Tencent and Alibaba, which nearly doubled in value.

The positive sentiment led to a good year for almost all risky assets. The improved growth outlook and China’s willingness to adjust its production of lower quality commodities contributed to strong returns for commodities. The copper price rose 31.7% and the oil price rose 17.7%. The continued low default rate and interest rate level lead to a 3% return for global Investment Grade credit (hedged to USD), while High Yield bonds returned 8%. The low level of realized volatility also meant that selling volatility was a profitable strategy throughout the year.

On the contrary, the risk free US and German government bonds were not very lucrative investments in 2017. The decline in unemployment rates in the Eurozone and US accelerated from 2016, and by the end of 2017, the unemployment rate in the US was at the same low level as during the boom in the beginning of year 2000. As that time, the Fed fund rate stood at 6.5% compared to 1.5% today. The US Fed raised interest rates three times in 2017, while the ECB signalled a reduction in its bond purchasing program (QE). An investment in German and US government bonds with a maturity of 1-3 years returned -0.9% and -0.7% respectively in 2017.

Results

The objective of Ferd’s investments with external managers is to complement Ferd’s direct investments. The investments are focused on strategies, markets and geographies which diversify Ferd’s total investment portfolio. The investments have a varying degree of net exposure to the market, and in sum a lower risk profile than Ferd’s total investment portfolio.

Ferd External Managers’ investment return for 2017 totalled 7.8%. After a challenging 2016 for several of our equity related investments, strong equity markets and outperformance by the equity long /short funds lead to a return of 17.6% for the global equity mandate, with an average net exposure to the market of 40%. Asian exposure in particular was a positive contributor to the results. Within the Relative Value mandate, which returned 4.8% for the year, the largest positive contributor was an equity market neutral fund which rebounded strongly from a weak 2016. A core holding in the mandate, a multi-strategy platform fund, delivered another solid year and was the second largest contributor. The largest detractor to performance was the mandate’s second multi-strategy fund, which we are in the process of exiting.

The Macro mandate, which comprises thee discretionary macro managers, returned 4.5% for the year. After strong results through the first nine months of the year, the portfolio had a weak Q4 following a selloff in a distressed sovereign debt position and a challenging December for certain currency and rate related positions.

The Global Fund Opportunities mandate returned 13% in 2017. We committed to two follow-on structures with existing managers focused on pockets of distress in Europe and Asia respectively. In Europe, the deployment rate has been high and we are optimistic on the quality of the investments.

Allocations

Turnover in 2017 was low. Entering 2017, we exited reinsurance based on the view that risk/reward had become unattractive. The capital was partially reallocated to existing managers within global equity and macro. The remainder was allocated to a new commitment in Global Fund Opportunities.

At year end, we are invested with a total of 16 different managers across the four mandates. The Relative Value portfolio totalled USD 250 MSUD across eight different managers. The Macro mandate is highly concentrated, with 88 MUSD divided among three managers. For global equity, which also includes long-only funds in its investment universe, we are currently invested with three managers, and AuM stood at 77 MUSD. The market value of the Global Fund Opportunities Mandate totalled 98 MSUD at year end, with undrawn commitments of 38 MUSD.

Organization

Following the expansion of the investable universe within global equity to include long-only, we have hired one person in 2017, who has primary responsibility for this. The team now comprises three investment professionals. Since the fall of 2017, we have spent a considerable amount of time mapping and analysing the investment universe for Asian focused long-only funds.