Norway’s Government Pension Fund Global (GPFG) is to replace its current strategic index with a new benchmark meant to offer greater flexibility.
The new approach, which Yngve Slyngstad, chief executive of Norges Bank Investment Management (NBIM), said stemmed from a recent review of the fund’s approach to active management, would also encourage “gradual” growth of private investments while allowing for a consistent benchmark approach across all holdings.
Speaking at a seminar at the Norwegian Ministry of Finance, Slyngstad said the review by Andrew Ang of Columbia Business School, Michael Brandt of Duke University and the former president and chief executive of the Canada Pension Plan Investment Board (CPPIB), David Denison, had shown how the GPFG could exploit investment opportunities currently outside the index.
He said the opportunity-cost model proposed was “worth exploring in more detail”, especially in light of the fund’s strategic benchmark – the FTSE Global All Cap index – excluding a number of countries with developed capital markets, such as Qatar and Kuwait.
The chief executive said it would come as no surprise that indices excluded certain countries as segments, but that it was potentially more surprising they did not reflect the listed market as a whole, citing free-floats.
“The global indices are designed to cater for the needs of an investor requiring daily liquidity,” Slyngstad said. “The fund has no such needs.”
He added that the obvious question was whether the sovereign fund should increase its exposure to less liquid assets, moving away from restrictions that require it to invest purely in public markets – with the exception of its 5% strategic investment to private real estate.
The chief executive explained that the framework proposed in the report would allow NBIM to boost private holdings, while analysing all investment opportunities the same way, based around the opportunity-cost model.
“A new framework for the management of the fund may also facilitate a development where we as manager of the fund take a greater responsibility by defining a tailor-made reference portfolio,” he added.
A planned switch away from its current strategic benchmark to one consisting of 60% listed equities and 40% fixed income is meant to express the fund’s risk tolerances rather than act as a limitation on the investable universe, Slyngstad said.
“This change would clarify the role of the strategic index in the management of the fund,” he said.