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Norges Bank Investment Management: Strategy shift at Europe’s biggest investor

Norway’s Government Pension Fund Global (GPFG), arguably the world’s most watched institutional investor, is considering adopting a risk-factor approach.

It means the NOK7.75trn (€848bn) fund holding the country’s petroleum wealth could soon be investing using methods also employed by Denmark’s ATP and influenced by asset management innovators Bridgewater and AQR.

Norges Bank Investment Management (NBIM), which manages GPFG, has formulated a new two-year strategy plan that introduces risk factors in its portfolio.

NBIM chief executive Yngve Slyngstad told IPE: “This is something we are thinking about. I think the new model of how we are funding real estate is one step in that direction, re-thinking asset allocation.

“It is also giving the board the possibility for asset allocation with regard to how we fund real estate.”

Some people would consider this a move towards the type of risk-factor approach ATP uses to build its investment portfolio, he said.

“For us, it is an adjustment of the current model, just recognising that real estate does not fit to the typical framework of giving a clear reference index,” he said. “Therefore, instead of trying to measure it against some other buildings that we didn’t buy, we are measuring the return on real estate against the rest of the fund.”

NBIM presents the fund’s investments in terms of the traditional asset classes – equities, fixed income, and real estate – but recent statements have indicated more flexible thinking is coming to the fore.

NBIM wrote to the ministry of finance last October about changing its mandate to allow for a new framework for property investments. This would allow it to sell parts of its equities and bonds holdings to release funds for new real estate investments.

Under the new framework, for example, NBIM may decide to fund a London property purchase with targeted sales of UK equities or sterling-denominated bonds, rather than selling assets across its whole portfolio.

In the October letter, NBIM said the management mandate for the GPFG “should ensure a holistic management approach”.

On the last day of February, NBIM published its strategy covering the period 2017 to 2019.

It stated that it did not expect the fund’s growth of NOK2.5trn seen between 2014 and 2016 to continue.

“We will develop the reference portfolio further to improve the total return-risk of the fund,” it said.

The GPFG already includes systematic risk factors in its reference portfolio to enhance returns, but it said in the new strategy document that it would include value, size, and quality factors in equity market investments, as well as term and carry factors in fixed income.

“We will assess additional sources of priced risk,” it said.

Øystein Olsen, chairman of NBIM’s executive board, said: “In general terms, we think the strategy is sophisticated and robust and solid, and we are going to continue the main elements of the strategies we have used previously, but with a number of new elements which you will find there.”

He added that the GPFG would have “very important new strategic parameters” for equities in the future. The fund is to be granted a new limit for equity exposure of 70%.

Separately, Slyngstad said that some of the fund’s equity exposure would be used to finance part of the real estate investments, and eventually – if there was a change in the investment mandate – to finance infrastructure investments. NBIM has been lobbying Norway’s government for the ability to invest in the latter asset class for some time.

“You shouldn’t expect any action in terms of a large buying programme if the equity is moved to 70%,” Slyngstad added.

When it was last granted an increase, in 2007, NBIM phased in new purchases, rather than buying large amounts of shares straight away.

“The lesson to be learned from last time is we may well sit around for some time and see when we find a good moment,” Slyngstad said.

GPFG made a 6.9% return last year, led by equities bouncing back from January losses. In 2015, the fund made a 2.7% return on investments after management costs.

Norway’s global and domestic funds flex their muscles

Norges Bank Investment Management has maintained its policy of excluding companies involved in the coal industry, excluding another 10 and putting two under observation in March.

The latest exclusions bring the total outlawed by the Government Pension Fund Global (GPFG) because of coal to 69, with 13 on a watchlist.

The move came as a result of the manager’s third round of analysis of businesses that may be affected by its coal criterion. All of the latest exclusions are unlisted subsidiaries that issue bonds.

Green bonds were excluded from the analysis, NBIM said, as well as subsidiaries with significant renewable energy activity.

The companies excluded are:

• CEZ (Czech Republic)
• Eneva (Brazil)
• Great River Energy (US)
• Otter Tail (US)
• HK Electric Investments & HK Electric Investments (Hong Kong)
• Huadian Energy (China)
• SDIC Power Holdings (China)
• PGE Polska Grupa Energetyczna (Poland)
• Korea Electric Power (Korea)
• Malakoff (Malaysia)

The two companies put on observation are both American: NorthWestern and Portland General Electric.

The SWF said it divested from 23 companies on the basis of ESG concerns in 2016, and exited 210 companies over the last five years on such grounds.

Separately, NBIM said it questioned firms about ESG issues in 1,500 company meetings last year.

Publishing its 2016 report on responsible investment, NBIM said good corporate governance and sustainable business practices were in the GPFG’s long-term interest. 

NBIM’s chief executive Yngve Slyngstad told IPE that in 2017 the manager expected to have 4,000 meetings with companies. It held 3,790 meetings with 1,589 companies last year. 

“In nearly half of those meetings, we raise issues on governance, environmental, and social issues,” he said.

Chairman of NBIM’s executive board Øystein Olsen added: “That does not mean that regularly we go public with any of these issues, but we do actually discuss them with the companies.”

NBIM said it would vote at all general meetings, and that during 2016 it had voted at 11,294 shareholder meetings.

“We are a large global investor with minority ownership in almost 9,000 companies,” Slyngstad said. “Good corporate governance and sustainable business practices will contribute to higher long-term returns.”

Meanwhile, GPFG’s sister fund, the Government Pension Fund Norway (GPFN) – which invests exclusively in Norwegian and Nordic assets – produced a return of 7.1% in 2016, beating the market average by 1.2 percentage points with higher prices for major exports swelling profits.

GPFN invests exclusively in Norwegian and Nordic assets. Its portfolio grew by NOK13.8bn (€1.5bn) over 2016 to finish at NOK212.3bn.

Olaug Svarva, chief executive of Folketrygdfondet, which manages GPFN, said: “Improved prospects for the world economy, a rise in oil prices and record high salmon prices gave solid results for the year.”

Folketrygdfondet reported that the fund’s equity portfolio generated 10.5% in 2016, with the fixed income portfolio making 2.2%. Both portfolios outperformed their benchmarks.

Svarva said Folketrygdfondet could be pleased that the return had been high for several years, but the world was changing and it could be hard to maintain these in the future.

“The pace of innovation is rapid, business models must be adjusted and international politics is changing,” she said.

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