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Norway’s vast Government Pension Fund has a justified reputation as a beacon of transparency amid the oft murky and mysterious world of sovereign wealth funds.
Fascinatingly for journalists, this means the fund, the world’s second-largest SWF with assets of Nkr2,500bn (£266bn, €307bn, $433bn), has no choice but to air its dirty laundry in public. And just such a public spat is afoot with a number of critics, including some opposition politicians, calling for the fund to abandon active management and adopt a purely passive approach.
The pro-passive voices have grown louder since 2008, when the fund’s benchmark fell 19.9 per cent but the fund itself lost 23.3 per cent, with the difference due to the poor showing of its roster of active managers.
Yngve Slyngstad, chief executive of Norges Bank Investment Management, the arm of Oslo’s central bank that manages the fund, is having none of it; he fervently believes the fund would benefit from more, not less, active management.
“Relative to our peers, very large institutional funds, we are probably relatively less actively managed than a lot of them. It’s not a question of whether we should be less actively managed, but a case of whether we should be more actively managed,” he argues.
NBIM is cagey about the proportion of the fund that is managed actively, but Mr Slyngstad adds: “It is clear that this fund, in most aspects, has been very conservative. The degree of active management has been modest or even low.”
Mr Slyngstad readily concedes that the fund had a “difficult year” in 2008, “both in absolute and relative terms”. Yet his belief in active, alongside passive, management is multi-faceted.
First, he argues that as one of the largest asset owners on the planet, NBIM has a duty both to engage in corporate governance with its investee companies and to help ensure markets remain efficient. He believes a purely passive fund would be a free rider, living off the sweat of others, in these regards.
“For a fund of our size there really isn’t any alternative [to active management],” he says.
“Indexing works fine as long as everybody else does not do it. We have certain obligations with regards to our ownership role and obligations with respect to our role in the investment community.” Second, in spite of the travails of 2008, Mr Slyngstad is convinced that NBIM can add value through active management.
In the first nine months of 2009 the fund generated an excess return over its benchmark of 3,4 percentage points. But the stronger evidence stems from an evaluation of the fund commissioned by Norway’s ministry of finance and conducted by three academics; professors Andrew Ang, William Goetzmann and Stephen Schaefer, of the Columbia Business School, Yale School of Management and London Business School respectively, which suggests that the contribution of the fund’s active managers since 1998 has been “slightly positive”.
At present, the fund is split 60/40 between equities and fixed income, but Mr Slyngstad is keen to expand the range of asset classes.
The Norwegian parliament, the Storting, has already agreed to let the fund build a 5 per cent allocation to real estate to improve diversification, although NBIM is still waiting for the green light from the ministry of finance to kick-start the buying spree, which Mr Slyngstad estimates will take more than two years to complete.
To Mr Slyngstad’s satisfaction, the money will come from the fund’s fixed income allocation.
“We have a very long-term fund and on that timescale we think there is less risk in being an owner than a lender,” he says.
To this end, he is also keen to add private equity and infrastructure to the fund’s asset mix. Mr Slyngstad does not believe the returns available from private equity significantly differ from those on offer in public equity markets, but he does believe the private class benefits from an illiquidity premium, something also likely to be true of infrastructure.
“Illiquidity was somewhat underpriced until 2008. Going forward we will probably get a bigger premium so the argument to go into alternative asset classes is probably clearer than it was three years ago, but we need a clear mandate to move in that direction,” he says.
Any future spending spree is likely to be significant, as Mr Slyngstad sees little point in adding an asset class if it cannot accommodate 5-10 per cent of the portfolio. But hedge funds are unlikely to be formally added to the mix, with Mr Slyngstad doubting whether they are truly an asset class and, perhaps unsurprisingly for a fund established to diversify Norway’s oil and gas wealth, commodities have been “discussed and dismissed”.
Investment trusts are also unlikely to play a significant role. NBIM has caused consternation since the autumn by selling sizeable stakes in a swathe of leading UK-listed closed-ended funds, such as Alliance Trust, Foreign & Colonial, Witan and Monks.
The sales pushed discounts to net asset value to their widest level for a year, nonplussing a sector that had hoped NBIM, which only started amassing its stakes two years earlier, would be a reliable, long-term investor.
Sadly for the investment trust sector, Mr Slyngstad believes the stake-building was a mistake when NBIM is perfectly capable of accumulating the underlying holdings of investment trusts without using middlemen.
“They were included in the benchmark that we had but conceptually we don’t think it’s a natural part of an index for an institution like ourselves,” says Mr Slyngstad. “We don’t necessarily need indirect ownership of these assets. The natural element should be direct ownership. If we wanted to own something indirectly it should be via a separate mandate.”
Having said that, Mr Slyngstad suggests the fund could return to the investment trust sector if opportunities arose. “We will be buying them if they go to a significant discount.”
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