The Norwegian economy, shaken by the free-fall in oil prices in 1998, has continued to surge ahead through the last year, as its favourite commodity price has recovered. Indeed, since the discovery of oil, the Norwegian economy has been more or less a reflection of the offshore industry.
Steady rather than spectacular growth has been the pattern, and the 1% increase of this year is expected to inflate to three per cent in 2000. This means the government can expect to add around NKr70bn (e8.5bn) to the petroleum fund taking this reserve to a near NKr300bn.
Such have been the government surpluses of the past decade that little thought has been given to pension reform, despite an ageing population. Furthermore, although new legislation is coming into force in the New Year, it is external forces which are provoking change in the investment market.
Surprisingly perhaps, the advent of the euro has had an impact in Norway, encouraging fund managers to look beyond national borders. “Although the launch of the euro does not really affect the domestic investment side, it has an impact on European investment,” says Peder Bruce CFO at Vital Forsikring ASA in Bergen. With more asset managers looking overseas for European mandates, the domestic market is seen as part of a pan-European perspective. “This has been one of the significant trends of the last 12 months,” says Bruce. “We now differ less and less between countries, and now concentrate far more on sector allocation.”
The importance of the euro is echoed by Anders Lundberg of Alfred Berg Asset Management in Oslo. “It has been influential, of course, because we now price everything against the euro, whereas before we used the Deutschmark. Also the spread of investment has moved towards the euro-zone far more than in recent years,” he says.
Leonard Benson at Carnegie Fond AB in Stockholm agrees that we are seeing an increasing interest in diversification away from national towards regional funds. “There is more appetite for risk diversification, but that is common across Europe and North America.”
This heightened awareness of Europe has led to a slight shift towards balanced mandates, although Lundberg sees little change. Bruce agrees that the trend is for a pan-European vision, and sees a move towards specialist-style mandates. He explained, “There is certainly a bigger focus on growth rather than value as before, with far less focus on geographical limitations.”
One recent piece of local legislation which could have more far-reaching consequences is the stringent new requirements placed on in-house managers. They now have to register as authorised asset managers, and are subject to the rules and regulations laid down by the government body under the auspices of the Finance Ministry. The impact on smaller funds is significant, as the new rules involve not only stricter regulation but also expense. Equally for the larger companies there are new opportunities. Bruce thinks some companies may well register to run their own schemes and then branch out into asset management. Lundberg disagrees,”I think it unlikely that more than a couple of companies will seriously try to enter the market place, although a significant number will continue to run their own schemes under the new rules.”
With well in excess of $40bn (e38.4bn) in national pension assets, representing more than 25% as a proportion of GDP, the shift, however small, could be significant for local managers.
Another significant development has been the emergence of the consultant. “We are finding more and more new funds are using consultants in their search for an asset manager,” says Bruce. “The larger mandates such as those pertaining to the petroleum industry set very high standards when making a management choice, and we spend a lot of time and money when we prepare our response.”
The problem for prospective asset managers is that through consultants, smaller funds are demanding similarly costly responses. “I see a big role for consultants in the future,” says Bruce.
As the economy continues on an upward curve, that future could be very busy as the flow of institutional investment continues to grow thanks to new pension funds, the growth of the insurance sector, similar expansion in mutual funds and the emergence of unit-linked products in insurance pension schemes. With this growth Lundberg expects price competition to get tougher. “I think we will see the price of segregated accounts come down, whilst pooled funds move in the opposite direction. The former will also reflect a geographical and sector spread of risk. I also expect to see more use of the derivatives market than in the past,” he says.
Bruce sees it as more a question of size, saying: “Of course a lot of institutional investment goes into pooled funds, especially the smaller investor. At the same time there is a huge use of segregated accounts, and I do not see one particular trend, except to sit on the fence and say one will not be used to the exclusion of the other, more often there will be a mix.”
The problem for many analysts is the lack of transparency in the operation of some of the larger funds. Benson says: “In the UK, people are used to large investors revealing whom they have hired and whom they have fired, that is simply not the case here. This may seem strange when we have all the major players here looking for mandates, but it is not the Scandinavian way of doing things. In the future, however, I imagine we will see some liberalisation.”
Where there is pressure for “more liberalisation” is in the rules which govern investment restrictions. At the moment pension fund investment and insurance company investment are governed by the Norwegian Supervisory Board of Finance. Equity investment is restricted to 35% of total assets, although most funds currently hold a percentage hovering around the mid 20s. That is generally evenly split between domestic and foreign shares, although all recent trends are towards more European stock. One of the reasons for this may be the role of the Norwegian government in some recent sell-offs and takeovers.
The government can still influence events through state shrareholdings in oil, banking and telecoms. The oil industry is dominated by Statoil and Norsk Hydro. In the financial sector the state also owns a majority of Den norske Bank Norway’s largest bank. Finally the telecom operators are 100% state-owned, and even next year’s IPO will see only 49% of stock available to the public.
Leiss Eriksrod, head of investment at Delphi Fondsforvaltning A/S in Oslo, feels there is still reason for optimism on the domestic stock front. “There has been a shift in sentiment over all sectors, but the political situation is causing a few problems. The minority government is locked by two warring opposition factions, one of which is undecided about privatisation,” he says. Eriksrod thinks, however, that there is no reason to believe that there will not be great interest in the telecoms sector, the privatisation of which has the approval of all parliamentary parties.
Similarly, although domestic bonds still account for almost half of average pension fund asset allocation, there is a significant trend towards a diversification abroad. “There is no doubt there is a move to spread fixed interest risk across a more international spectrum,” says Bruce. “Previously we were limited by rules on foreign currency exposure, but now we are seeing a move towards foreign bonds.”
The other interesting development has been the booming property sector, although opinions differ on the value of such investment. “Looked at over the past 10 years property has been a poor investment compared with other areas,” says Benson. But in Norway the rise in property prices seems irreversible. “I do not see any reversal in the trend, and would expect many of the pension funds to hold as much as 10% of their assets in real estate,” counters Lundberg.
Bruce also confirms that the larger institutions average between 8 to 9% of property amongst their holdings. “This is growing slowly, and is done via direct investment rather than in the stock of development companies. Indeed, some institutions are setting up their own real estate companies. Once again, this has always been a domestic market, but as in other areas and sectors a pan-European philosophy is emerging,” he says.