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Analysis: Norway’s Government Pension Fund Global

A greater focus on real assets through the introduction of an unlisted infrastructure portfolio, and the expansion of the real estate exposure of Norway’s NOK7.1trn (€733bn) sovereign wealth fund, could soon bring to an end one of the great certainties among asset owners – the Government Pension Fund Global’s stable, almost static asset allocation. 

The fund may also take on greater equity risk, and increase its strategic allocation beyond 60%, which currently means it owns about 2.5% of the European listed market and 1.3% of all listed stocks. The potential changes mark a sea change, as the strategic asset allocation at Europe’s largest asset owner has remained largely unchanged for nearly a decade.

Since 2007, the fund has invested 60% of its portfolio in equities and the remainder in fixed income. A 5% allocation to property was authorised in 2008 and, since, 2010 Norges Bank Investment Management (NBIM) has been building a portfolio worth 3% of assets. While the investment universe of the equity and bond portfolio has expanded to encompass developing markets in the Middle East and Africa, when measured against fellow sovereign funds, it has remained fairly traditional. 

The Norwegian Ministry of Finance has now asked a group of nine experts, including two former finance ministers, to review the equity quota in light of the low yields on its bonds and fixed-income portfolios. 

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While taking on greater equity risk may not sound unusual as such, the sheer size of the fund means that even a relatively small increase will have an impact. 

There are three ways NBIM could go about growing equity exposure. It could increase its stake in the current universe, it could increase its allocation to new and emerging economies, where exchanges are perhaps not as mature as in some developed markets, or it could strategically grow its stake in certain companies.

Simply growing its overall stake of the investment universe would be the easiest way to boost the equity portfolio, while maintaining its current strategy of universal ownership. The fund would unlikely acquire many new holdings in the process, and the burden on NBIM’s governance team would remain the same. 

Increasing exposure to emerging markets could prove more problematic for a couple of reasons. First, markets such as China still strictly limit the amount of shares foreign investors can buy, and second, these young exchanges do not have enough companies listed with sufficient market caps to absorb the billions of euros that could flow their way. 

NBIM is unlikely to become involved in the business of running businesses. If there were any inclination on the government’s part to allow the sovereign fund to pursue such an approach, it would have followed its peers in Asia and the Middle East – such as Singapore’s GIC and the Abu Dhabi Investment Authority – into private equity long ago. Pension investors, such as a number of the Canadian funds, have also shown that outright ownership of companies can boost returns. 

But there are indications NBIM will become more actively involved in some companies, having recently taken up seats on nominating committees and, as part of its latest business plan, signalling that it will grow its minority stake in select companies. 

Taking larger stakes in certain companies and fulfilling its role as an engaged shareholder is a logical next step for a fund with a multi-generational time horizon. Who better to profit from the premium stemming from a well-governed company than a fund so large that the 4% drawdown limit might not see it depleted for centuries?

A more activist role would also benefit the market as a whole, allowing the ever more transparent NBIM to lead by example, improving governance standards in markets as laggards would be forced to comply with a higher bar set through the asset manager’s engagement. 

The government’s decision on the new equity quota is not expected before 2017, giving NBIM time to decide which of the three options it wants to pursue.

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