Deep Thoughts by Knut Kjaer

Ashby Monk

I recently came across a very interesting Powerpoint presentation by Knut Kjaer, current President at GCapm and former CEO of Norges Bank Investment Management. Knut is sort of a star within the small sovereign fund world, so I’m always interested to hear what he’s saying. And, in this Powerpoint, I think he really hit the nail on the head; I found myself whispering little encouragements (“Yes!” “That’s so true!” “Yeah, no kidding!”) as I flipped through the slides. I assure you, that doesn’t happen every day. So, I decided to make Knut one of my 2011 ‘deep thinkers’. Without further ado, here are some ‘deep thoughts’ by Knut Kjaer:

“Typical institutional investors spend 80-90 percent of their time on implementation issues, building complexity, rather than on strategic and ALM issues that normally determine 80 – 90 percent of expected risk and return.”

“The ultimate long-term investor is contrarian. Building a successful investment strategy is to acknowledge the pro-cyclical human instincts and safeguard against it by setting up institutional frameworks.”

“Asset management and risk are two sides of the same coin. Asset management must be based on the underlying risk factors. Risk management should be centered along the basic strategic choices: why do we take on the risk initially and are we rewarded for the risks that we are taking?”

“A complex environment has enormous potential to generate truly confusing surprises. Reality is immensely more complex than models, with millions of weak links.”

“The financial industry is all about principal – agency dilemmas. You easily become a victim if you engage (directly or indirectly) in activities beyond your core competence and skill set.”

“Rebalancing maintains optimal utility and prevents the asset with the highest drift from eventually dominating the portfolio holdings. Thus, rebalancing ensures diversification and mitigates risk.”

And there are plenty more interesting nuggets in there. For example, I thought this chart was quite useful in thinking through the many challenges facing investment decision-makers:

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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