The role and functions of Strategy within the Corporation's activities

- Saule, we are glad to introduce you to our readers. Please tell me, as a term, strategy is wide in scope, what does it mean within the Division’s function?

-Hello! I am also pleased to tell you about the activities of the Corporation, and in particular, about Strategy Division. By strategy we mean an investment strategy, which implies an identification of investment goals and an optimal portfolio construction. As the legendary investor who grew Yale University Endowment from $1 billion to $31 billion, David Swensen said, the successful investing is the proper use of three basic tools - asset allocation, security selection and market timing. Moreover, according to Swensen, more than 90% of the result is related to the decision on asset allocation, which is the main purpose of Strategy Division. It is worth noting here that the quote rather refers to a portfolio with traditional assets, but in the world of alternative investments, asset allocation plays an important role as well, where another vital component of success is undoubtedly the selection skill of an investment manager and/or fund.

- Could you tell us what are the goals and objectives of the Strategy Division within the framework of the Corporation's activities?

- Strategy Division forms the general management of the Corporation’s assets, develops recommendations on long-term expectations and target allocation of the portfolio of alternative instruments (AI). In other words, imagine a ship that sets out in a long voyage and needs a guide that will lead it to a destination, just as the Strategy Division defines guidelines so that the Corporation can achieve its goals. The aim of AI portfolio management is to achieve long-term rate of return exceeding the rate of return of the reference portfolio, with an equal or lower level of risk, and not lower than the minimum level of long-term rate of return. In other words, the main objectives of Strategy Division are to determine the most effective allocation of the portfolio relative to the reference portfolio, i.e. the situation when return to risk ratio of the portfolio exceeds the ratio of the reference portfolio, and to develop recommendations for achieving the efficient allocation, the so-called investment plan. If readers are interested, we can tell about " reference portfolio" approach in a separate article, including advantages of the approach and its parameters defined for the Corporation.

- Saule, what major directions and functions of Strategy Division can you highlight?

There are three main directions of our Division.

For example, the first and fundamental, as I mentioned above, is to determine the most effective target asset allocation of the AI portfolio, so called Policy portfolio. To achieve it, Strategy Division regularly analyzes the expected returns and risks of traditional and alternative asset classes, as well as macroeconomic and market conditions. Then, taking into account the analyzed data, recommendations on strategic allocation are formed, which allows to form a long-term investment portfolio based on market expectations. The target allocation of the Corporation's portfolio is formed based on the results of portfolio optimization by asset classes - depending on the characteristics of financial instruments, target ranges for portfolio allocation are determined. The concept is based on the principle of diversification, which allows reducing risk and ensuring the stability of the portfolio to various phases of the cycle by allocating part of the portfolio into “protective” assets and another part to "growth" assets. It should be noted that the Policy portfolio is long-term based and determines the target allocation of the portfolio by asset classes, including traditional and alternative instruments. Alternative asset classes include private equity, real estate and infrastructure, as well as hedge funds. Traditional assets include public equity and debt instruments, which are necessary to maintain sufficient liquidity. Liquidity needs are based on specifics of private market investments, as well as rebalancing of the portfolio.

Additionally, the Strategy Division develops recommendations on the parameters of sub-portfolios of asset classes. Each asset class in the portfolio managed by the Corporation is allocated to a separate sub-portfolio. So, at present, the Corporation has such sub-portfolios as private equity portfolio, real estate portfolio, hedge fund portfolio and portfolios of stocks and bonds, in addition infrastructure portfolio is being launched. The parameters of sub-portfolios are defined for each portfolio and include the target level of rate of return, risk limits, requirements for diversification, as well as a list of instruments.

Another function is the development of a joint investment plan with other investment divisions. The plan is being developed to achieve the target allocation, and determines the investments pacing in various strategies, regions and sectors in the short and medium term. The plan also takes into account structural changes in the global economy and determines macro trends.

The next function of Strategy Division is direct participation in investment selection, in particular, participation in the investment due diligence process. The Strategy Division presents its independent conclusions on prospective investments and if they fit into portfolio.

The Division, when conducting analysis, focuses on the compliance of the investment with the investment plan and the impact of the investment on the portfolio as a whole; an integral part of the analysis is an overview of market of particular asset class, drivers of future growth, macroeconomic outlook and trends.

Due to the specifics of investments in private markets, it is necessary to maintain a sufficient level of liquidity to fulfill capital calls of commitments. In addition, as a part of the monitoring process, the Division provides the forecasts on expected future cash flows.

And the last but not least, an important area of Strategy Division is analytical research, which includes analysis of current macroeconomic events, regular reviews of alternative markets, reviews of markets/strategies and new directions. The analyses allow not only to identify and assess the opportunities and risks of certain investment ideas, but also contribute to formation and development of a common vision between departments through open dialogue and discussions.

- Saule, thank you for your time and we will look forward to the next interview about the "Reference Portfolio " approach, why this approach was chosen and about its parameters defined for the Corporation.