NORWAY – Norges Bank Investment Management’s short-term “trading” approach to the management of the 86.5 billion-euro Petroleum Fund is in contrast to a more conventional institutional approach, says a new report.

Mercer Manager Advisory Services, in a report commissioned by the Norwegian Finance Ministry, says NBIM’s investment process is a “trading-type” culture which represents a relatively short-term time horizon. Mercer says the NBIM’s culture “contrasts with a more conventional institutional approach”.

“Whilst we understand and agree with the theory of combining lowly correlated alpha portfolios, we question how well these low correlations stand up in extreme market conditions,” the report states. “The evidence suggests that they can become highly correlated in extreme conditions.”

The report also warns NBIM about its selection of external managers. “The selection and monitoring of external managers requires significant effort,” says Mercer Manager Advisory Services. “Our primary question is whether NBIM has sufficient resource dedicated to this area; although there are dedicated selection/monitoring teams, they are very small.”

It also said that NBIM has a high turnover of external managers. “We understand that this was due to changes within the managers’ organisations as well as the strategic move to bring equity index management in-house, but turnover per se is negative and we suggest that turnover levels should be kept under watch.”

According to the most recent figures, 22% of the fund is managed by external managers. The fund’s management costs rose to 172.8 million crowns, or 11 basis points, from 128.7 million crowns, or eight basis points, in the first quarter of 2002.

The Mercer report says that since inception in 1998, NBIM has “moved significantly in the direction of becoming a ‘bone fide’ investment organisation” with an “ethos of responsibility and accountability”.

But it said that there has been a 50% turnover in senior management at NBIM since it was launched.

The report goes on to suggest that NBIM should re-examine its stance on tactical asset allocation, having been withdrawn from it following a poor early experience.

The Petroleum Fund returned -1.7% in the first quarter, taking its market value to 682.0 billion Norwegian crowns (86.5 billion euros) at the end of the first quarter. This represents an increase of 73.0 crowns since the end of 2002.

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