The investment management of Norway’s giant sovereign wealth fund has added only half the degree of value to the fund than large traditional pension funds around the world – but the costs entailed are less than a quarter of its peers’ investment expenses, an officially-commissioned report has revealed.
In an annual report comparing the investment cost effectiveness of the Government Pension Fund Global (GPFG) with other funds internationally, Canadian consulting firm CEM Benchmarking said net value creation – net return minus the return on the benchmark index – in the fund’s management between 2010 and 2019 had been 0.2 of a percentage point on average per year.
This was below the median net value creation of the peer group of large pension funds used for comparison, which was 0.4 of a percentage point per year, according to the report.
This net value creation – the component of total return from active management – related to different policy returns for the funds being compared, the report showed.
The average annual return on the GPFG’s benchmark over the 10-year period was 7.6%, measured in international currency – lower than the typical benchmark in the comparison group of 8.7%, measured in the same currency basket, the Ministry of Finance said in its statement on releasing the report.
However, the sovereign wealth fund’s costs came out as far lower than those paid by peers.
The typical investment costs of Norges Bank, which runs the fund via its Norges Bank Investment Management (NBIM) subsidiary, were 4.7 basis points in the 10-year period scrutinised, compared to median costs in the comparison group of 39.2 basis points.
The peer group used by CEM in the comparison was composed of the 10 largest global pension funds. While their assets under management ranged from €116bn to €464bn, the funds’ average resources were still dwarfed by the GPFG’s €938bn.
The comparison group funds included two Canadian funds, two European funds, two Asia-Pacific funds and four US funds.
The finance ministry said in its statement on the report that management costs largely reflected the funds’ asset allocation, which was a result of the chosen investment strategy.
“The funds in the comparison group have on average a lower allocation to equities and bonds and a significantly higher allocation to unlisted assets than the GPFG,” the government department said, adding that the latter asset type had higher management costs than listed investments.
Further analysis by CEM showed that given the median costs the peer pension funds incurred for services, if they had the same asset allocation as the GPFG, their costs would have been 18.6 basis points year – 13.9 basis points higher than the Norwegian fund’s costs.
“This is mainly due to the fact that Norges Bank has chosen a higher proportion of internal management than the funds in the comparison group,” the ministry said, adding that internal management generally cost less than external management.
In its analysis, CEM pointed out that the GPFG’s policy asset mix was more globally diversified than the average fund in both the peer group and the wider group of global funds it examined.
Other differences to comparison funds’ average asset allocation evident in CEM’s data were that over the last 10 years, the Norwegian SWF had a weighting of just 1% to real assets, compared to 12% for the peer group.
They also had 7% and 3% of assets in private equity and hedge funds respectively – asset classes that were absent from the GPFG’s portfolio mix, according to the report.
“Regional allocations can significantly influence the policy return,” CEM said in the report.
It added: “GPFG’s overweight in European securities and the peer group’s overweight in North American securities would cause a difference in the policy returns.”
Variations in the fixed-income portfolios, such as duration, credit quality and country allocation within regions, would have an impact as well, it said.
“Not being invested in asset classes like private equity and having a lower allocation to real estate also had an impact on GPFG’s policy return,” said CEM.
The ministry also said differences between the nature of the funds used as reference in the report made comparisons difficult – including the fact that a large proportion of the peer group were pension funds.
“Many pension funds seek to adjust their investments to their pension obligations in order to reduce overall risk,” the ministry said, adding that these funds therefore had other purposes for their investments in addition to achieving the highest possible return over time.
“In contrast to traditional pension funds, the GPFG is not earmarked for special obligations,” it added.
CEM also gave the finance ministry an estimate of costs for passive management of the GPFG of 3.0 basis points, but said this was uncertain given the limited number of funds the figure was based on.
The ministry said Norges Bank had itself estimated in its 2019 return and risk report that passive management of the fund over the last five years would have cost about three basis points a year.