Analysis: Norges Bank - Looking before leaping
The Norwegian government is having to make up the rules for the NOK7.5trn (€826bn) Government Pension Fund Global (GPFG) as it goes along. One of the principles appearing to guide lawmakers in this process is building up as much expertise as possible before doing something new.
The government has been considering expanding the GPFG’s investment universe to include unlisted infrastructure ever since 2014, but last April it turned down a proposal from the fund’s manager, Norges Bank Investment Management (NBIM), to add the asset class, largely because of the risks and unknown consequences of making the move.
The Finance Ministry justified its refusal to allow unlisted infrastructure, citing uncertainty over whether the asset class would, in fact, improve risk diversification or increase returns.
A number of factors suggested unlisted infrastructure should not be allowed, finance minister Siv Jensen said, including that these investments are exposed to high regulatory and political risk, and that conflicts with the authorities of other countries would be difficult to handle and would carry reputational risk for the fund.
Jensen said it would be useful to gain more experience with unlisted real estate before the fund considered other unlisted asset classes.
At present, the fund’s managers have built up less than a year’s experience investing in real estate since it was allowed. However, the ministry has been busy canvassing opinion on how to manage the risks involved with unlisted infrastructure, and it could come up with a different decision when it publishes its 2016 report.
Late last year, NBIM chief executive Yngve Slyngstad and central bank governor Øystein Olsen wrote to the ministry. Even though there was scant publicly available information on how large institutional investors managed risk in their unlisted infrastructure investments, the men gave their impressions.
It seemed, they said, that this risk was usually handled by using concrete investment restrictions, doing due diligence ahead of investing and carrying out continuous follow-up. They suggested that the GFPG could limit risk by putting three restrictions in place:
• The fund could limit investments to the energy, communications and transport sectors in Europe and North America;
• Investments could be restricted to those undertaken in collaboration with partners;
• Limits could be set on the ownership stake the fund could take in the assets.
As far as the fund’s new benchmark index is concerned, unlisted infrastructure investments should follow the same rules as for unlisted real estate. They would not form part of the benchmark index but be included in the limit for tracking error, which Olsen and Slyngstad said would allow NBIM to manage market risk and currency risk at an overall fund level. In keeping with the fund’s approach to unlisted property investing, the manager would gradually build up its expertise in unlisted infrastructure.
Addressing other potential uncertainties that the Finance Ministry expressed last year, Olsen and Slyngstad said unlisted infrastructure could be handled by fewer staff than unlisted real estate, and that the investments in the new asset class would be small in number but high in value. The men also reassured the ministry that Norges Bank would be as transparent with its unlisted infrastructure investments as it was for its three existing asset classes.
The consultancy McKinsey has also been telling the Norwegian government how it thinks the regulatory and political risks of infrastructure investment can be reduced. The firm said that, although these risks are higher for infrastructure than for other asset classes, they are not the same for all segments of the market, so risk exposure can be managed by picking segments.
Between now and March, the ministry will be digesting these and other expert opinions as it deliberates on whether the GPFG can now forge ahead into a sector increasingly favoured by institutional investors around the world.