Ferd’s risk willingness and risk bearing capacity will vary over time, reflecting both the availability of attractive investment opportunities and the company’s view on general market conditions.
When changes need to be made to Ferd’s overall risk exposure, considerations of stability for the management of the business areas make it important that the changes are carried out without having too large an effect on the strategy of the individual business areas. The allocation of new capital, as well as the reallocation of capital between business areas, represents a systematic approach to making use of the group’s capital base and risk-bearing capacity. Ferd has held, and continues to hold, a high exposure to market risk, and maintaining gearing at a relatively moderate level has been necessary to ensure that the overall risk exposure does not become excessive.
Ferd operates with a long-term investment horizon, and this means that the owner can accept substantial fluctuations in value-adjusted equity. The objective is to ensure that if Ferd suffers a permanent loss on any single investment, the loss will not be on a scale that would force Ferd to change the composition of its overall portfolio.
Criteria for the risk of fall in value
Ferd’s allocation of its capital must be consistent with the owner’s risk tolerance. One measure of risk tolerance is how large a fall in value in monetary or percentage terms the owner is prepared to accept if the markets to which Ferd is exposed experience a sharp and rapid fall. The risk of fall in value, calculated on the basis of various assumptions, must not normally be greater than 35% of Ferd’s overall portfolio. The risk of fall in value provides guidance on how large a proportion of equity can be invested in asset classes with a high risk of fall in value. The risk of fall in value is measured and monitored with the help of stress testing. Risk of losses is expressed as the potential overall fall in value, expressed both as an absolute amount and as a percentage of value-adjusted equity.
Criteria for financial risk
Ferd Capital’s purchases of businesses and Ferd Real Estate’s investments are project financed through separate holding companies. This means each project is essentially assessed by the market, which protects Ferd’s other capital from some of the financial risk associated with increased borrowing. Ferd’s other assets, principally Ferd Invest and Ferd External Managers, therefore constitute the principal security for the parent company’s loan facilities. Ferd has always paid close attention to liquidity as part of its risk management. We have always held liquidity comfortably in excess of the minimum liquidity requirements that are set internally and in loan agreements at the parent company level.
Ferd has a conscious approach to currency exposure. If its exposure to any one currency is viewed as either too high or too low, Ferd will regulate this by taking out a loan in the relevant currency at the parent company level, or by using derivatives.