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Sovereign wealth funds' strategies 'limited by talent issue'

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  • Sovereign wealth funds' strategies 'limited by talent issue'

GLOBAL - Public pension funds such as the Norwegian Government Pension Fund Global lack the time and talent to pursue alpha-and-alternatives strategies such as those adopted by US endowment funds, a US-based think tank has claimed.

In a note published this week, the Sovereign Wealth Fund Institute contrasted the "Norway model" - characterised by lower security ownership positions, low cost, greater transparency and less use of alternatives - with a Yale University endowment model focused on alternatives and uncorrelated investments, private equity and larger equity positions.

Despite the Norwegian oil fund's limited investments in real estate - notably, joint ventures in London super-prime and shareholdings in property companies through its investment manager NBIM - the think tank points to its reliance on public investments, in contrast to other sovereign wealth funds' increasing appetite for real estate.

NBIM spokesman Øystein Sjølie pointed out that the Norwegian oil fund still fell considerably short of its target 5% allocation to real estate.

Sovereign Wealth Fund Institute's report said: "The bigger the stake, the more the investor grows idiosyncratic risk. This type of risk forces many investors to become activist shareholders, thus engaging in more shareholder activities, increasing financial and time costs."

The Norwegian fund's average shareholding in any company is less than 3%, with its largest single stake in a company the NOK31bn (€3.9bn) exposure to Royal Dutch Shell, which accounts for 2.2% of the oil company's shares.

"Our ownership ceiling is 10%, which limits the scope for activism," said Sjølie.

"Nevertheless, we contribute as an owner, by voting at AGMs, engaging in dialogue and filing proposals."

The institute suggested that, although most institutional investors adopt both alpha and beta strategies, concern over cost and a lack of internal talent would act as a barrier to the $443bn (€339.3bn) Norwegian pension scheme investing through active management.

The report said: "Developing alpha strategies internally is even more difficult, as many public investors have a challenging time hiring and retaining talent.

"In terms of assets under management, Norway's [sovereign wealth fund] is much larger than the Yale endowment. But to implement the Yale endowment model would be very costly."

Although he declined to comment on the cost issue, asked whether the pension scheme was facing a shortage of talent, Sjølie said: "It is always very important for us to recruit talented individuals."

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