The fund’s return of 25.05 per cent  for the year beat the reference portfolio  by 6 per cent. Its cumulative return since  inception is 7.83 per cent.  In the past year, Orr says, most of  the portfolio performed strongly. In  particular, timber, private markets and  portfolio completion all added value.  “Active investment done well can add  significant value, but on average it is lost  in a wash of poor data. And there is a  survivorship bias,” he says.  Another internal investment  function, and one that Orr says has been  one of the more pleasing in the past few  years, has been “portfolio completion”.  It aims to reduce the direct costs of  investing, such as fees, but also indirect  costs, such as market impact and losses  on currency markets. Its tasks include  liquidity and derivatives management,  and arbitrage.  “We have saved tens of millions and  gained direct profit from it,” Orr says.  This group has foreign exchange and  fixed income, equity and commodities  capabilities. It has opened the door  to information [into] investment  banks globally and it’s a true backstop  to measuring hurdles, liquidity and  challenging investment professionals.”  The fund uses a thorough and strict  assessment process when it selects  external investment managers. For those  managing listed assets it establishes a  “conviction” framework, including five  “pure hygiene” tests the manager must  pass, Orr says. They are trust, alignment  of interests and conflicting interests,  business viability and capacity.

Managers are then scored on a series  of factors, including ownership, team  experience and philosophy, but also risk  management and dealing efficiency.  “We have spent a lot of time  internally debating these questions and  what weight to give them,” Orr says. “And  we have a history of exiting managers  because we have lost conviction in them.”  Private markets managers undergo a  different selection process. Skills such as  originating deals, execution and valueadd  through ongoing management are  prioritised. Less emphasis is placed on  portfolio construction, capacity and risk  budgeting.  The fund doesn’t employ what  Iverson calls “traditional” active managers  but allocates mandates according to  market opportunities.  “We have managers that specialise  in particular areas and change the  manager set according to the changes  in opportunities available,” he says. “The  bulk of exposures are now through  passive, derivatives and where there are  particular opportunities.”

The fund has only operated according  to this particular opportunity-driven  approach to mandates for a few years so  it is hard to measure how much it will  change in different market environments.  “Hygiene” factors being equal,  manager selection is driven by the  opportunities available and not  assessments of their investment  processes, Iverson says. Currently these  opportunities include currency plays,  which include an overweight position in  the undervalued U.S. dollar and euro,  Orr says.  “We are not market timing, but  saying the risk premium is sufficient.