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Norwegian Government Pension Fund Global: Changes at the margins for oil giant

Falling inflows from oil revenue to Norway’s leviathan Government Pension Fund Global (GPFG) will not change the NOK7.1trn (€762bn) sovereign wealth fund’s investment strategy or its need for diversification, according to the fund’s second in command. Trond Grande, deputy chief executive at Norges Bank Investment Management (NBIM), which manages the GPFG, said in an interview with IPE: “The fund and its investment strategy are basically the same, regardless of growing much more or when there are withdrawals from the fund.” 

Norway’s Government Pension Fund Global (GPFG)

• Law first passed to establish GPFG’s predecessor, the Government Petroleum Fund, in 1990. In 2006, the fund was renamed the Government Pension Fund Global
• Manager: Norges Bank Investment Management (NBIM)
• Assets: (end March 2016) NOK7.08trn (€759bn)
• Current asset allocation: (end March 2016) Equities 59.8%, fixed income 37%, real estate 3.1%
• Current strategic asset allocation: Equities 60%, fixed income 35%, real estate 5%
• Chief executive: Yngve Slyngstad
• Scope of corporate ownership: Has shareholdings in 9,000 companies across 75 countries, owning 1.3% of the world’s listed companies and 2.4% of those in Europe

The Norwegian government withdrew money from the GPFG for the first time in the first quarter of this year, taking NOK25bn out of the fund in the period. In average terms, the fund’s inflows climbed every year between 1999 and 2013, from which point they have declined. Norway’s financial fortunes have been hit by the fall in the global price of oil, with Brent crude prices having collapsed in the past two years to lows of about $30 (€26) a barrel in February from about $115 at the beginning of 2014.

Asked whether the prospect of lower oil revenues reducing future inflows to the fund – and possible repeats of the latest withdrawals by the government – made the fund’s push to increase asset-type diversification less urgent, Grande said: “No, I don’t think the two things really play together.” The changes in inflows and outflows so far are basically “just around the margins”. He added: “The investment strategy will be, for all practical purposes, the same, until Parliament decides different.”

The Norwegian Parliament’s Standing Committee of Finance and Economic Affairs held an open hearing in May to discuss the finance ministry’s white paper on the management of the GPFG, which contains various recommendations for change, including an increase in the real estate allocation to 7% from 5%. In its advice to the minister of finance prior to the white paper being drafted, NBIM recommended in December that the real estate allocation be raised to 10% and that the fund be allowed to invest in unlisted infrastructure for the first time. Permission to take on infrastructure was declined for the time being by the ministry in its white paper.

Asked whether the fund were now becoming a more active owner of companies, Grande said: “Yes, that’s absolutely what it is – we’re not an activist investor, we’re an active investor, and we’re not a passive investor – we’re in the middle there. It means we take our fiduciary duty seriously, as we are one of the largest shareholders of many of these companies, particularly in Europe, and it goes hand in hand with good governance and good long-term returns.” 

In its first-quarter report, NBIM said the GPFG had done more work between January and March on standard-setting and expectations for the companies in which it invests. It said this work included publishing a new expectations document on human rights and updated voting guidelines with the aim of making the fund’s voting more principles-based and predictable – taking account of “company-specific factors” and supporting the fund’s long-term strategy. “So yes, we are active and engaging with the companies with the aim to achieve the highest possible return in the long run,” Grande said.

Still on the hunt

With respect to real estate, Norway’s sovereign wealth fund is still on the hunt for opportunities, despite not making any new investments in the first quarter of the year, according to its real estate chief. In the first three months of this year, the GPFG made no new real estate purchases but sold two logistics properties in Spain in partnership with Prologis.

Karsten Kallevig, chief executive of Norges Bank Real Estate Management, which runs the fund’s unlisted property investments, said: “There will be times when we don’t do any transactions, as we’ve said in this first quarter, which must have been one of the few quarters, looking back, when we haven’t done any.”

The GPFG is gradually increasing its real estate exposure – which stood at 3.1% at the end of last year – to meet its strategic target of 5%. This has been funded mainly through the sale of fixed income investments. The Norwegian finance ministry has proposed that this strategic target be raised to 7%.

The fund has the task of reaching its targets at a time when real estate prices are, in many cases, at record highs. While prices are sure to fall at some point, Kallevig said, his organisation still has a mandate to invest in real estate as part of the GPFG’s objective to diversify its overall investment portfolio. “We try to do the best within the mandate we’re given. It’s very hard to predict the future, [so let’s] continue the path we’re on.”

In spite of high real estate prices, Kallevig said the gap between bond rates and real estate yields was also as wide as it had ever been. “Negative interest rates have gone from being an academic curiosity to being the norm,” he said, adding that, in this scenario, he did not know what would happen.

Moving into Asia

The fund is ready to start real estate investments in Asia, with in-house staff on the ground in local markets – but it has yet to make any purchases. The real estate department opened two offices, in Tokyo and Singapore, in October last year. The strategy in Asia will be the same as elsewhere, Kallevig said. “We’ve picked two cities – Singapore and Tokyo – because we think those are two good places to start, and the strategy is very similar to what we have done elsewhere.”

The fund will target core, long-term markets, seeking high-quality buildings or those that can be improved. “We would like to start out with partners, so we’ve just got to find the right partner and the right assets, and we’re patient, so that might be sooner or it might be later,” Kallevig said.

Kallevig told a news conference in April that the fund’s entry into the logistics sector in December 2012 had been a very deliberate move. “First of all, our mandate says we should be diversified in sectors as well as geographies, so it’s partly a mandate question,” he said. “At the end of the day, our strategy has never been to buy the fancy buildings we can talk about at cocktail parties.”

The foundation for the fund’s real estate strategy, he said, has been to invest in long-term markets. “We have such a big allocation that, for us to get into a trading mentality, buying and selling, would be very hard on this scale, and the transaction costs that come with every single deal are typically so high.”

Kallevig said logistics was a sector that balanced the real estate portfolio. “You can argue it’s a hedge against internet shopping in the retail component. But, at the end of the day, it’s really a question of ‘do you think over time the world will stay global, that products will be produced in one location and consumed in a different location?’ If you say ‘yes’, then chances are you’re going to need logistics space.” 

In February, the fund sold stakes in Spanish logistics properties in the northern city of Zaragoza and the port town of Valencia, but it remains exposed to the sector in Spain, with stakes in logistics units outside the capital city Madrid.

Norges Bank’s real estate management operation was set up as a separate unit in August 2014. At the end of 2015, staff levels stood at 122. Kallevig acknowledged this was less than the 200 forecast in its 2014-16 strategy plan but added that it was almost double its level at the beginning of 2014.

“We expected there would be some significant growth in the years ahead. Part of that was dependent on transaction volumes, which have been pretty good, but also on our geographic growth,” he said. “Regardless of what our future plans are, it’s very helpful for an organisation to bring on board new people, culturally and also organisationally. And regardless, we would need to take a slight breather.”

Kallevig said he expected to be able to continue to build the team, as it was important to have a competent organisation capable of managing the portfolio. “But at the same time, I don’t think we’re going to reach 200 by the end of the year,” he said.

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