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IPE special report May 2018

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NBIM weighs move towards ATP-style risk-factor portfolio approach

Norway’s Government Pension Fund Global (GPFG), the world’s third largest institutional investor, says it is considering adopting a risk-factor based portfolio construction similar to that developed by Denmark’s ATP.

Norges Bank Investment Management (NBIM), which manages the NOK7.5trn (€845bn) fund holding the country’s petroleum wealth, has introduced a new two-year strategy plan that heralds the inclusion of risk factors in its portfolio.

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.

Asked if NBIM saw a case for using an ATP-style risk-factor approach, for example, the manager’s chief executive Yngve Slyngstad told IPE in an interview: “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 now 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 wrote to the Ministry of Finance last October about changing its mandate to allow for a new framework for property investments, which allows it sell specific 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 by 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 new strategy document covering the period 2017 to 2019.

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

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

NBIM also said it would decide the funding for each real estate investment considering its impact on the overall fund.

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, told IPE: “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 going to 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 told journalists that some of equity exposure the fund 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.

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