The manager of the domestic and Nordic element of Norway’s sovereign wealth fund has issued a defence of the practice of securities lending, saying that it leads to correct market pricing and more investors should do it.
Jørgen Krog Sæbø, chief investment officer, fixed income, at Folketrygdfondet, said: “We at Folketrygdfondet believe that lending shares naturally belongs to a long-term investor.
“In fact, we believe more investors should lend their shares to support a more liquid market and more correct pricing, while providing an additional source of return,” he said in a commentary from the Oslo-based institution.
While a source of revenue for many investors, securities lending is controversial because it can deprive owners of voting rights, and also because most borrowers are short sellers, whose activity reduces the price of assets.
Sæbø said that in line with its mission, Folketrygdfondet – which manages the NOK340bn (€28.6bn) Government Pension Fund Norway – wanted to help ensure the market was liquid and well-functioning.
“Lending shares is a limited, but still important activity that makes the market work better,” he said, adding that it also made a contribution to the return. “Win-win,” he said.
“Securities lending is often associated with one-sided speculation in price falls, so-called short selling, but is also used to facilitate other financial activities such as derivatives trading and collateral,” Sæbø said in the commentary released last Friday.
Lending activity was therefore important to lubricate the entire financial machinery, he added.
For a company, it should be important to attract long-term and professional investors, Sæbø said, arguing that artificially high share prices resulting from a lack of shorting would keep investors away.
By returning share prices to more natural levels attractive to buyers, short selling contributed to increased turnover, therefore better liquidity and lower transaction costs, he argued.
“Experience from the financial crisis also shows that a ban on short selling led to increased risk and weaker turnover, but no increased return for shareholders,” Sæbø said.
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