Norwegian oil fund: unification or division
As the largest pot of institutional money in Europe and the third largest in the world, the NOK4.4trn (€558bn) Norwegian Pension Fund Global (NPFG) was bound to be the topic of debate during Norway’s recent election. Ahead of the polls in early September, the governing coalition’s Centre Party (SP) spoke in favour of a greater exposure to real estate in developed nations and shifting some of the fund’s management from Norges Bank Investment Management’s (NBIM) Oslo office to Trondheim. SP’s Ola Borten Moe recommended doubling the current 5% property allocation, potentially managed in a separate fund.
The Conservative Party’s Erna Solberg – prime minister designate – went one step further and argued that there could be more than two funds responsible for the assets. She said that, as a conservative, she believed an element of competition was preferable to a monolithic fund, opting for division, even as the neighbouring Swedes mull the merger of several AP funds.
Allowing for greater competition may be an understandable motive, but it is questionable whether it is a sensible one. David Smart, global head of sovereign funds and supranationals at Franklin Templeton Investments, notes that NBIM is “rightfully proud” of its low management costs – only 0.06% in 2012.
If the fund were to be divided, costs would rise as the benefits of scale fell away, but not to the extent that NBIM would be able to manage its investments. The fund would have to remain as an index-based investor, albeit one shifting from issuance-based to GDP-weighted indices. Smaller funds are also not necessarily more nimble, Smart says, as market-capacity constraints still tend to affect investors much smaller than the Pension Fund Global.
However, a shift in strategy or split of the funds could play into the hands of the Progress Party (FrP), Solberg’s junior coalition partner. Advocating greater investment of Norwegian oil wealth in domestic infrastructure over “unsafe” bonds and equities would require infrastructure to be permitted as an asset class, as well as the lifting of the current domestic investment ban.
Meeting FrP’s demands would also run counter to NBIM’s shift towards emerging markets. In an effort to diversify away from Europe, the fund over the past two years has invested in Qatari and Kenyan equities and bought Columbian and Thai sovereign bonds.
Proving that NBIM will be criticised regardless, a recent report funded by Norwegian Church Aid called for even greater EM investment and a possible standalone growth fund, arguing that its current European allocation left it “unacceptably exposed” to the developed world’s domestic crisis, and that it could put its assets to use in addressing Third World poverty.
Report author Sony Kapoor of think tank Re-Define says he thinks the fund “squanders” its opportunity as a truly long-term investor. “The [NPFG] deliberately spreads itself thin, taking small stakes in a much larger number of companies, almost the whole market index itself,” the report notes, contrasting this with the acquisition of strategic stakes undertaken by the Singaporean sovereign funds and the Qatar Investment Authority.
Smart, however, warns against the belief that only through holding emerging market assets directly can the fund be seen as helping those markets. “A little bit of a fallacy is that developed markets only have exposure to developed markets – there is an awful lot of emerging market in there, indirectly, particularly in Europe.”
He thinks the most convincing case for leaving the fund unified is the one Solberg uses to call for division – its size. Discussing Borten Moe’s proposed property fund, he says:
“There would be a significant temptation for that real estate-only vehicle to be forced into buying too much real estate in one go, and therefore potentially paying too much.” He admits the lack of investment opportunities is a problem for fast-growing assets, but says it is the best argument for retaining a holistic management model.