Spare a thought for the incoming Conservative-led coalition government in Norway. The likely next Norwegian prime minister, Erna Solberg, has a problem every other leader would like to face: how to supervise a massive sovereign fund that already has assets of more than 150% of the country’s gross domestic product, and is destined to get even bigger in coming years.
The Conservatives are toying with the idea of splitting up the Government Pension Fund Global (GPFG ), run by Norges Bank Investment Management (NBIM), as a means of increasing flexibility and boosting returns.
The problem is that even smaller spinoffs from the fund — which weighs in at $780 billion and is due to rise to well over $ 1 trillion in coming years as a result of additional capital from oil and gas revenues — would still be larger-than-life on the Norwegian landscape. Losses of efficiency rather than better performance might be the result.
Norway has a long tradition of openness and espousal of ethical values, so every step of the GPFG’s investment strategy is analyzed minutely by the Norwegian media, Parliament and public opinion. Rightly it is considered a benchmark for many sovereign funds around the world.
It invests only outside Norway, part of a strategy of building up funds for future generations and keeping inflows away from the Norwegian crown. NBIM has committed itself to a highly ambitious annual real return of 4% while adhering to the most advanced industry standards.
The result is an accelerating need for diversification, including into “real assets” like property.
Concentration on Europe is likely to fall dramatically as more capital, in both bonds (at present out of favor at NBIM) and equity, is invested in the non-industrialized world.In the medium term the fund will be invested roughly one-third in Europe , America and the emerging markets.
Although the fund has made several recent forays into real estate, including in an enterprising £250 million U.K. warehouse deal with U.S. landlord ProLogis PLD +0.16% , such is NBIM’s oil tanker-like size that it will take years before the targeted 5% of money in real estate is actually achieved.
Meanwhile NBIM is building up plentiful expertise in emerging market currencies including the Chinese renminbi. In a giant laboratory experiment, NBIM is expanding its credentials as a “responsible investor” through its holdings of publicly traded shares, making up nearly 60% of total volume.
On average NBIM owns 1% of all listed companies in the world, a proportion that rises to 2.5% for European companies. NBIM is among the top five shareholders in hundreds of companies. In 500 companies the fund is in a permanent process of monitoring and dialogue to promote the best corporate governance standards.
But the protective potential of diversification is limited. First, in a new financial crash we will probably see that investments in many asset classes are correlated. That was the case in 2008-09, and — given the pace of globalization — is likely to be even more so next time round.
Second, the high-level corporate governance approach and open access to markets that Norway legitimately demands from its western counterparties do not exist across the board in developing countries.
Achieving breakthroughs here will take time. In the meantime, such investments are out of bounds. Third, in many countries there is next to no correlation between economic growth and stock market prices.
As an example, the adjusted market value (in dollars) of the Shanghai stock market XX:000010 +0.44% remains today behind its level 20 years ago — despite a 20-fold increase in China’s economic output over this period.
During the same time the GDP of the euro area has not quite doubled, but the dollar-based MSCI Europe index XX:990400 -0.69% has more than quadrupled. The Norwegians know that, in an ever more integrating world, diversification is necessary — but it is no panacea against investment ills.
marketwatch.com
The Conservatives are toying with the idea of splitting up the Government Pension Fund Global (GPFG ), run by Norges Bank Investment Management (NBIM), as a means of increasing flexibility and boosting returns.
The problem is that even smaller spinoffs from the fund — which weighs in at $780 billion and is due to rise to well over $ 1 trillion in coming years as a result of additional capital from oil and gas revenues — would still be larger-than-life on the Norwegian landscape. Losses of efficiency rather than better performance might be the result.
Norway has a long tradition of openness and espousal of ethical values, so every step of the GPFG’s investment strategy is analyzed minutely by the Norwegian media, Parliament and public opinion. Rightly it is considered a benchmark for many sovereign funds around the world.
It invests only outside Norway, part of a strategy of building up funds for future generations and keeping inflows away from the Norwegian crown. NBIM has committed itself to a highly ambitious annual real return of 4% while adhering to the most advanced industry standards.
The result is an accelerating need for diversification, including into “real assets” like property.
Concentration on Europe is likely to fall dramatically as more capital, in both bonds (at present out of favor at NBIM) and equity, is invested in the non-industrialized world.In the medium term the fund will be invested roughly one-third in Europe , America and the emerging markets.
Although the fund has made several recent forays into real estate, including in an enterprising £250 million U.K. warehouse deal with U.S. landlord ProLogis PLD +0.16% , such is NBIM’s oil tanker-like size that it will take years before the targeted 5% of money in real estate is actually achieved.
Meanwhile NBIM is building up plentiful expertise in emerging market currencies including the Chinese renminbi. In a giant laboratory experiment, NBIM is expanding its credentials as a “responsible investor” through its holdings of publicly traded shares, making up nearly 60% of total volume.
On average NBIM owns 1% of all listed companies in the world, a proportion that rises to 2.5% for European companies. NBIM is among the top five shareholders in hundreds of companies. In 500 companies the fund is in a permanent process of monitoring and dialogue to promote the best corporate governance standards.
But the protective potential of diversification is limited. First, in a new financial crash we will probably see that investments in many asset classes are correlated. That was the case in 2008-09, and — given the pace of globalization — is likely to be even more so next time round.
Second, the high-level corporate governance approach and open access to markets that Norway legitimately demands from its western counterparties do not exist across the board in developing countries.
Achieving breakthroughs here will take time. In the meantime, such investments are out of bounds. Third, in many countries there is next to no correlation between economic growth and stock market prices.
As an example, the adjusted market value (in dollars) of the Shanghai stock market XX:000010 +0.44% remains today behind its level 20 years ago — despite a 20-fold increase in China’s economic output over this period.
During the same time the GDP of the euro area has not quite doubled, but the dollar-based MSCI Europe index XX:990400 -0.69% has more than quadrupled. The Norwegians know that, in an ever more integrating world, diversification is necessary — but it is no panacea against investment ills.
marketwatch.com
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