Adopted by the Board of the Foundation on 10 June 2019.
Guidelines for the Foundation’s asset management
The Foundation for Baltic and East European Studies (Östersjöstiftelsen) was established by the Swedish Government on 23 June 1994. The Foundation’s mission is to support research, doctoral education and academic infrastructure related to the Baltic Sea Region and Eastern Europe at Södertörn University. The Foundation is led by a Board. Under the Statutes, the Foundation’s entire capital, which from the beginning amounted to SEK 1,270 million, cannot be depleted. The assets must also be managed safely, in such a way as to limit the risks and make use of the scope for a good return.
The Board has appointed an investment delegation and a research delegation. On the Board’s behalf, the investment delegation is responsible for the asset management and reports to the Board.
This investment policy was adopted by the Board on 13 December 2016 and is revised annually. If a need arises, the Board can make day-to-day decisions on changes to the investment policy.
Purpose of the investment policy
This policy document constitutes the framework for conducting the Foundation’s asset management. More specifically, the purpose of the policy is to regulate how, overall, the Foundation’s assets are to be invested, responsibilities divided, management decisions made, and risks and internal control handled. The policy also defines how ethical and environmental issues, and reporting routines, are to be managed.
Target return for asset management
The Board has set the following asset management targets:
- The Foundation’s assets must be managed so that its return — on a stable, long-term basis — can fund research at Södertörn University. The support for Södertörn University should be so dimensioned that there is a high likelihood of the original endowment capital retaining its real value intact over time.
- The Foundation’s capital must be invested so that it provides an annual real return of at least 4.5% on a 10-year time horizon. ‘Real return’ refers to nominal return — that is, interest and other direct return plus realised and unrealised value increase, minus annual inflation measured as the change in the consumer price index (CPI).
The deciding factor for whether the Foundation achieves the target return is allocation among various asset classes. The Board therefore adopts a normal portfolio annually, specifying the asset-class distribution. In adopting the normal portfolio, the Foundation must take into account the level of risk in its asset management.
For the current normal portfolio, see section 4.1.
Responsibilities and powers
In matters of asset management, the Board is responsible for:
- compliance with the Foundation’s charter
- deciding on investment policy, the normal portfolio and exposure limits
- continuously reviewing asset management in terms of set objectives, risk limits and compliance with investment policy
- appointing an investment delegation, tasked with preparing and deciding on asset management issues, comprising at least two of Board members
- ensuring that asset management is conducted with the requisite skill.
On the Board’s behalf, the investment delegation is responsible for:
- managing the Foundation’s securities portfolio within the framework of the normal portfolio adopted and permitted exposure limits
- deciding, within the framework of the investment policy adopted, on purchase and sale of the Foundation’s securities, and giving external and/or internal managers the detailed instructions that they need to execute the investment policy, or that the delegation otherwise deems appropriate
- continuously keeping the Board informed of the delegation’s decisions and the results of the asset management, and where necessary proposing to the Board changes in the investment policy adopted
- making decisions on selection or, where appropriate, replacement of one or more external managers
- making decisions on exemptions from the investment policy when special circumstances so require, and reporting exemptions to the Board immediately.
On behalf of the Board, the Investment Director is responsible for:
- ensuring compliance with the investment policy
- preparing documentation, such as analyses, asset management reports, follow-ups, etc., for the Board and investment delegation
- ensuring that financial agreements and transactions take place within the framework of this investment policy
- representing the Foundation vis-à-vis external counterparties in ongoing matters
- continuously informing the Board and investment delegation, and also the Foundation’s auditors, about activities in the asset management.
The investment delegation may assign its mandate wholly or partly to asset managers.
The Investment Director may delegate the task of representing the Foundation to external counterparties in ongoing individual matters, either to another member of the investment delegation or to another employee at the Foundation’s secretariat.
Besides the above provisions on responsibilities, the Investment Director’s mandate includes, between investment delegation meetings:
- buying or selling shares up to a net total of SEK 50 million in major companies listed on the Nordic stock exchanges; ‘major’ means having a market value exceeding SEK 5 billion
- buying or selling bonds up to a net total of SEK 15 million; there must be liquidity in the bond — that is, it must be tradable
- deciding on supplementary investment in an existing unlisted holding or a small listed company up to SEK 5 million within the risk limit adopted.
‘Net’ refers to the sum of purchases and sales. If the Investment Director opts to utilise the above mandate, this must be reported to the investment delegation and entered in the minutes at the next meeting.
Like most other foundations, the Foundation for Baltic and East European Studies takes a permanent stance on its endowment capital, which means that it must be managed so that it, at least, retains its real value indefinitely. Based on this permanent stance and the Foundation’s return requirements, the investments must be permeated by the following fundamental principles:
- The Foundation can invest the capital in three main types of security categories:
Group 1. Stable listed shares and other securities with equity-like risks and returns
Group 1a. Shares and stock-market indices. ‘Shares’ refers to listed companies with a market value exceeding SEK 5 billion that, over time, have demonstrated stable profitability and are expected to continue to do so. ‘Stock-market indices’ refers to investments that provide exposure to the performance of a stock-market index. For example, they may be stock-index bonds or futures that can increase or decrease the portfolio’s stock exposure.
Group 1b. Securities with equity-like risks and returns. These may be property-related assets, high-yield bonds, preference shares with a known return, and aggressive hedge funds and fixed-income funds. It must also be possible to regard this sub-portfolio as having an overall risk level and an expected level of return resembling those of Group 1a, although the return profile may well deviate from the stock market.
Group 2. Smaller companies
‘Smaller companies’ refers to unlisted companies and listed holdings where the Foundation’s shareholding is >3%, and where the total company value does not exceed SEK 5 billion. The difference between unlisted shares in Group 1 and Group 2 is that the risk of the initial individual investment in smaller companies is significantly higher than the risk for Group 1 investments. For Group 2, investing in growth companies is the usual aim.
Group 3. Liquidity and defensive fixed-income investments
‘Liquidity and defensive fixed-income investments’ refers to the assets that need to be available for current payments, as well as to fixed-income investments and hedge funds in which the risks and expected returns are significantly lower than those of the fixed-income securities in Group 1.
- The Foundation’s emphasis should be on Group 1.
Over time, the Foundation strives to invest a majority of its managed capital in Group 1 securities. The motivation is that, in the long term, this type of investment provides a significantly higher return than, for example, low-risk bonds. The Foundation’s good solidity and permanent stance on its endowment capital enables it to withstand the asset portfolio’s high volatility without putting the Foundation’s purpose at risk.
- Other principles
The Foundation strives for risk diversification within each securities category through well-diversified portfolios.
The Foundation strives for a low turnover in its portfolio and low management costs, as these have a significant impact on performance in the long term.
The Foundation continuously reviews the ethical and environmental aspects of its capital investments.
The Foundation works independently in managing its assets and makes its own investment decisions.
Normal portfolio and exposure range
The table below shows the Foundation’s current normal portfolio and permissible deviations.
|Asset class||Minimum exposure||Normal portfolio||Maximum exposure|
|Group 1a (Shares)||20%||40%||55%|
|Group 1b (Equity-like risk and return)||20%||40%||50%|
|Group 2 (Smaller companies)||5%||10%||20%|
|Group 3 (Defensive interest-bearing investments)||5%||10%||40%|
The normal portfolio is calculated on the basis of exposure, not allocation of market values. Unlike allocation, exposure also gives a picture of any leverage or hedging.
Guidelines and risk limits for each category of securities
Investments may be made in the following instruments:
Swedish and foreign listed shares
‘Swedish and foreign listed shares’ refers to equities, depositary receipts, subscription rights, convertible bonds and securities funds that are invested in equity-related instruments, and also those providing stock-index exposure. The shares must be traded regularly on an authorised exchange open to the public, under the supervision of the Swedish Financial Supervisory Authority or a corresponding foreign government agency.
‘Property-related assets’ refers to investments in companies that own commercial, residential and special-purpose property (such as police headquarters). Property investments may be made both in companies and in funds. Every investment must entail a clear strategy aimed at a well-diversified property portfolio. Property-related investments are often structured in two parts, shares and loans, but the entire investment is nonetheless classified as a property investment.
Eighty per cent of the investments in this asset class must be in Sweden. This limitation applies to ownership in the property company or property fund concerned and, where applicable, when the investment is divided into a share portion and a loan portion.
High-yield interest-bearing securities
‘High-yield interest-bearing securities’ refers to interest-bearing assets with low or no credit rating. These should preferably be traded regularly on one of the authorised Nordic exchanges (such as Oslo Børs and Nasdaq OMX). Exceptions to this principle apply in four situations:
- Property transactions, in connection with transactions where the purpose is to acquire property-related assets but the transaction often takes place with shares and loans combined in a single part.
- Loans with collateral, when senior loans for properties are issued and the Foundation is offered good collateral in these properties.
- Fixed-income funds, in funds that invest in interest-bearing assets where the securities are not necessarily listed on an authorised exchange.
- Side investments, when the Foundation may invest in direct loans alongside the fixed-income funds in which it has invested; in doing so, it may invest up to SEK 30 million in a single direct loan.
‘High-yield interest-bearing securities’ may also refer to preference shares, with a known return, listed for regular trading on one of the Nordic exchanges, and also to fixed-income funds or equivalent that invest in securities, as defined above.
The Foundation can invest a maximum of 25% of its assets in high-yield bonds.
‘Hedge funds’ are defined as funds with an absolute target return. The purpose of hedge funds is to obtain a risk exposure that deviates from the main strategy. Investments in hedge funds may not exceed 10% of the foundation capital.
‘Smaller companies’ refers to unlisted shares and listed holdings where the Foundation’s shareholding is >3%, where the total company value does not exceed SEK 5 billion. Property-related assets are never regarded as ‘smaller companies’.
- The Foundation is allowed to invest a maximum of 15% (the proportion at the time when the investment is made) of the foundation capital in this asset class.
- In the long term, the Foundation may not have holdings in more than 20 smaller companies.
- Ownership of unlisted companies may not exceed 50% in terms of either capital or votes. In exceptional cases, the Foundation may temporarily hold more than 50% of the capital or votes in an unlisted company for a maximum period of 12 months.
- The Foundation may not normally invest more than SEK 50 million in a single company. For this to happen, a Board decision is required. An exception to this is when an investment is made in a company or fund that, in turn, invests in a portfolio of unlisted companies. The Foundation may invest a maximum of 5% of its foundation capital in such holdings.
- The Foundation may exceptionally be the sole major shareholder in one of the smaller companies.
Liquidity and defensive fixed-income investments
‘Interest-bearing investments’ refers to investments in individual securities or funds that yield a known return, and may be classified as:
- cash and cash equivalents
- securities issued or guaranteed by the Swedish state
- securities issued by Swedish municipalities
- securities issued by a Swedish credit institution
- securities issued by Swedish housing institutions
- securities issued by foreign banks
- securities issued by a Swedish public company with a credit rating of BBB (’investment grade’) or better.
Defensive fixed-income investments also include hedge funds with a risk-and-return structure similar to the defensive fixed-income investments listed above.
Other risk limits
Counterparties Approved counterparties in transactions with the portfolio’s listed assets are:
- securities institutions authorised by the Swedish Financial Supervisory Authority for trading in financial instruments on behalf of clients in accordance with the Swedish Securities Market Act (2007:528).
- another Swedish legal person authorised to trade in financial instruments in its own name on behalf of others, or foreign institutions that have similar authorisation.
The portfolio’s assets must be held at a securities institution that is authorised by the Swedish Financial Supervisory Authority to receive securities for safekeeping, and/or foreign institutions that have corresponding authorisation, in accordance with the Swedish Securities Market Act (2007:528).
Financial assets — shares, bonds, etc. — attributable to an individual issuer, or to issuers within the same corporate group, may amount to no more than 5% of the foundation capital at the time of investment. The Swedish state and issuers equated with the state, such as Swedish Export Credit Corporation and Kommuninvest of Sweden, are entirely exempt from this restriction. No more than 7% of the Foundation’s assets may be invested in any one of four banks (Nordea, Svenska Handelsbanken, SEB and Swedbank) individually.
Derivatives may be used for the purpose of obtaining a certain desired exposure, rationalising the Foundation’s investment activities or protecting the Foundation’s assets against exchange-rate and currency risks. Investments in derivative instruments can be made with underlying assets in securities, money-market instruments, financial indices, certificates or foreign currency. Derivative instruments may not be used to construct leverage whereby the security falls more from the nominal value than the underlying asset. For example, if the Foundation has acquired a share basket certificate at a nominal value of 100 to replicate the Swedish stock exchange index, the asset may not fall more than the Swedish stock market index. On the other hand, if the certificate has gone up from the nominal value of 100 because of leverage, it may fall to the 100 level with the same leverage.
The Foundation must take the currency aspect of asset management into account. If investments are made in foreign securities, the currency risk must be considered and managed through a currency-hedging strategy. The purpose of this strategy is to reduce the possible negative impact that the currency component can have when foreign assets are invested in. The Foundation does not need to currency-hedge each individual asset, but must at all times consider the portfolio’s total currency exposure. The net currency exposure must not exceed SEK 500 million or represent more than 40% of the Foundation portfolio’s currency exposure.
The Foundation may not take positions in currencies other than Swedish kronor without this being justified by investments in securities in that particular currency. The Foundation hedges only three currencies: the dollar, euro and pound sterling. The Foundation may use currency futures only as hedging instruments. For cost reasons, the Foundation must strive for contract periods as long as possible, but may hedge currencies for terms of 1–12 months.
This is permitted if it conforms to terms and collateral requirements that are customary in the industry and is expected to contribute to greater returns.
‘Liquidity risk’ refers to the risk that a financial instrument cannot be sold without a major discount. The Foundation needs to be able to turn over a certain proportion of its assets at short notice to be able to disburse grants and costs. In view of this, at least 20% of the capital must be invested in assets that can be disposed of within five days at a relevant market price.
Review of investment strategy
In the main, long-term (8–10 years) review , comparison is made with the absolute, real return target defined in this document. Moreover, the management is continuously evaluated on the basis of the Foundation’s annual forecast of its assets’ performance, based on the forecast model developed by the Foundation.
The management is also continuously compared with the normal portfolio’s benchmark index, which is compiled by weighting the benchmark indices of the various sub-portfolios according to the benchmark values set by the Board. The sub-portfolios and benchmark indices are as follows:
|Group 1a (Shares)||OMX SGI||40 %|
|Group 1b (Equity-like return and risk)||CPI + 4,5 %||40 %|
|Group 2 (Smaller company portfolio)||CPI + 4,5 %||10 %|
|Group 3 (Defensive interest-bearing securities)||OMRX T-bill Index||10 %|
Ethical and environmental considerations
Styrelsen och placeringsdelegationen skall löpande bevaka stiftelsens innehav av enskilda aktieinvesteringar ur etisk synpunkt. Med aktieinvesteringar avses börsnoterade bolag med ett marknadsvärde överstigande 5 miljarder kronor. Det grundläggande förhållningssättet härvidlag är att stiftelsen så långt möjligt skall undvika att äga aktier, andelar och fordringar i företag, institutioner och organisationer som uppsåtligen bryter mot svensk lag eller mot internationella avtal och konventioner som Sverige undertecknat. Denna etik- och miljöscreening utgår bl.a. från FN:s deklaration för de mänskliga rättigheterna, barnkonventionen, de centrala ILO-konventionerna, miljökonventioner och konventioner mot mutor och korruption. Domstolsutslag, officiella gransningar eller direkta erkännanden ligger till grund för beslut att utesluta ett företag från placeringar. Om etikscreeningen ger etikvarning för något av bolagen i stiftelsens portfölj tar placeringsdelegationen beslut om försäljning. Om stiftelsen ska ha kvar innehavet trots etikvarning måste styrelsen fatta sådant beslut.
Monitoring, reporting and internal control
The Foundation must continuously monitor its asset management with regard to financial position, portfolio allocation, return targets and compliance with the investment policy.
Monthly reporting and monitoring
Reporting must be carried out according to the following report plan:
|Monthly report: return on and allocation of all asset classes and individual assets, and also the past month’s transactions.||Monthly||Board and investment delegation||Investment Director|
|Investment delegation’s report: overall monitoring, incl. return analysis, exposure, forecast follow-up.||Ahead of meetings (normally every 4–6 weeks)||Investment delegation||Investment Director|
|Board’s report: macro situation and follow-up of forecasts, monitoring of normal portfolio and monitoring according to the traffic-light model.||Ahead of Board meetings (normally 4–5 times/year)||Board||Investment Director|
|Internal control report: review of investment policy compliance, investment decisions versus risk limits.||Annually||Board and Investment delegation||Investment Director|
|Risk report: annual follow-up of asset management in relation to an ALM study, covering valuations, risks, etc.||Annually||Board||Investment delegation|
In addition to the above fixed reports, the Investment Director must continuously monitor the Foundation’s asset management.
Once a year, a review of the Foundation’s asset management must be carried out by an external party. The purpose of this review is to ensure that the asset management follows the investment policy regarding, for example, risk limits, decision-making processes and reporting routines.
The Foundation’s forecasting model
Annually, the Foundation forecasts the anticipated performance of its assets (with three different scenarios) five years into the future. This is continuously tracked against actual performance and forms the basis of the Foundation’s overall investment decisions. On an annual basis, this must be updated with regard to changes in the Foundation’s various assets, total capital and assumptions about changed prospects.
Traffic-light model, currency and stock exposures
The Foundation measures exposure to various financial risks in the portfolio using the Swedish Financial Supervisory Authority’s traffic-light model. The monthly reports submitted to the Board therefore account for:
- buffer capital — that is, market-valued assets minus the foundation capital in relation to the foundation capital
- total stock exposure at each reporting date, taking into account any leverage in the various financial instruments owned by the Foundation
- total currency exposure at every reporting date in relation to underlying assets in the exposed currency.
Measures in the event of sudden loss of expertise in asset management
Since the Foundation has a small operational organisation for asset management, there is an operational risk to manage. The current rules of procedure are as follows:
- The investment delegation makes all the decisions on purchases and sales, and other decisions affecting the Foundation’s holdings of shares and share-related instruments. It also makes all investment decisions affecting the size of the interest-bearing portfolio. Exceptions to this rule are stated in section 4 in this document, ‘Responsibilities and powers’.
- The investment delegation notifies the Swedish Legal, Financial and Administrative Services Agency of its decisions, and the Agency executes all decisions, payments and settlements and, in doing so, attends to all practical details and all contact with brokers, broker-dealers and banks.
- The Agency handles all accounting and drafts the figures for the annual accounts.
- At the end of each month, the Agency prepares a detailed report on the status and performance of its assets.
- The Foundation has an Investment Director, who is in charge of liaising between the investment delegation and the Agency; prepares the delegation’s meetings; reports to the Board; and drafts the textual content of annual accounts for the asset management. The Foundation also has two deputy investment directors whose primary responsibility is for unlisted companies, but who have the skills profile required to carry out the Director’s duties.
- More or less daily, the Director monitors the performance of the Foundation’s equity portfolios, using Bloomberg’s databases and analytical instruments. The Director performs the more comprehensive, in-depth analyses that form the basis of the delegation’s decision to invest in new equity portfolios and carry out major restructuring of existing portfolios. The Director also handles analysis and negotiation of the more complex investment instruments, such as the share-related certificates. All the material is managed by means of secure back-up at Södertörn University.
In the event of a sudden loss of skills:
- If the Investment Director or one of the deputies for the same leaves the Foundation’s employ, the remaining person has the skills to manage the entire asset management assignment in the short term. In the event of a sudden loss of both the Director and a deputy, the following decisions are required.
- The Swedish Legal, Financial and Administrative Services Agency is assigned by the Board’s Chair to make the ongoing decisions that are necessary, in the Agency’s judgement, such as participation in new issues, splits and the like.
- Until the Board has been convened, no unforced decisions on purchases and sales should be made. The investment strategy is not of such a nature as to require prompt decisions concerning the total portfolio.
- As soon as possible, the Board should make a decision on the asset management, to apply until further notice. There are three primary options: a. To supplement the delegation with one person, appoint a new Investment Director or deputy to the same and then continue as usual until new arrangements, if any, are introduced. b. To task the Legal, Financial and Administrative Services Agency to carry out the management until further notice, with the same guidelines as those the Investment Director or deputy investment director(s) had. c. Not to make any unforced purchases and sales until new arrangement have been introduced.
- The incoming Investment Director, or another suitable person appointed by the Board, heads the task of preparing documentation for decisions on how to organise asset management in the long term.
Revision of the investment policy
This document must be revised annually and subsequently approved by the Board. However, the Board is entitled at any time to approve deviations from the provisions in the investment policy.
‘ALM’ stands for Asset Liability Management and is a study aimed at ascertaining that asset management can meet both short-term and long-term payment commitments, while also providing the highest possible return on capital.
Interest-bearing securities and equities are two examples of asset classes.
A financial product based on an underlying basket of stocks. The value of the certificate depends on the performance of the stocks in the basket.
A promissory note with a time to maturity of (originally) more than one year.
Convertible debt instruments
Promissory notes issued limited companies that entitle their holders to completely exchange their claim for shares in the companies concerned.
This is the risk of assets listed in a foreign currency falling in value, as measured in the rise in the investor’s own currency relative to the fall in the foreign currency.
Derivative instruments (derivatives)
A derivative instrument is a security whose value depends on an underlying asset such as equities, bonds, interest rates, indices and currencies. The most common derivatives are futures and options.
Diversification is a fundamental concept in modern portfolio theory. It is based on the fact that, when two assets are combined, the total risk is less than the sum of the risks in each of the individual assets separately. By investing capital in several different assets and placing them with managers who have differing management styles, diversification — that is, risk diversification — is achieved.
Duration may be described as the interest-bearing portfolio’s weighted average remaining time to maturity. The duration is determined by the remaining maturity of the bonds and coupons, the size of the coupons and the level of interest rates. The higher its value, the more sensitive the portfolio is to changes in the market interest rate. The duration of a ‘zero-coupon bond’ is equal to its time to maturity, and for a coupon bond the duration is shorter than its time to maturity.
The value, expressed in kronor or as a percentage of the total portfolio, that changes as a result of changes in the price of, or interest rate on, a security.
A mutually binding agreement between two parties on the purchase and sale of a certain quantity of a commodity, with settlement on an agreed future date. Examples are stock, interest-rate and index futures.
A collective term for many different types of asset management styles, with some common features: absolute return targets, low correlation with traditional assets (equities and interest-bearing securities) and very broad, unconventional investment rules (loans, derivatives, short positions). Hedge funds contribute to portfolio diversification.
Index, benchmark index
Measures the value of a market or submarket. Examples: the SIX Portfolio Return Index (Swedish equities) and the OMRX Total Bond Index (Swedish nominal interest rates).
An issuer makes new shares or other securities available.
Liquid assets are defined as cash, cash equivalents, balances in custody and other bank accounts, daily deposits, special deposits and the kinds of short-term fixed-income securities that have been acquired to constitute a liquid investment.
Measures the extent of trading, or volume of transactions, in an instrument or market. The term is also used for cash.
Rating, rating categories
A credit rating is a relative assessment of an issuer’s ability to meet its payment obligations on time. As a rule, a rating refers to a given loan programme or other particular debt obligation, and is an estimate of the borrower’s ability to repay securities issued in the programme at the correct time. However, a rating may also refer to a particular issuer’s ability to fulfil all its payment obligations. Internationally, ratings are set by institutions such as Moody’s and Standard & Poor’s.
Long-term distribution among asset classes, specified by investors. It seldom changes.
Short-term distribution among asset classes. Utilised within defined limits in relation to the strategic allocation. Changes frequently.