Norway sets standard in investment world
Tuesday, 4 September 2007
David Ibison
WHEN Iraq's government was looking for advice on how to invest billions of dollars of future oil revenues in a way that would underwrite the nation's prospects without ruffling geopolitical feathers there was only one country it could turn to: Norway.
It was not alone. The Oslo government runs an official programme on how to run sovereign wealth funds and has worked with authorities in Kazakhstan, East Timor, Bolivia, the Faroe Islands and several African countries among others.
Norway sets the standards by which other sovereign wealth funds are judged, providing benchmarks for the transparent and accountable management of massive assets in a manner that does not distort the normal working of markets - and which generates decent returns.
With pressure on the World Bank and International Monetary Fund to impose guidelines on the way sovereign wealth funds are run, these institutions are also expected to turn to Norway for inspiration. Indeed, contact has already been established.
The task of managing Norway's oil wealth falls to the Government Pension Fund-Global (formerly known as the Government Petroleum Fund). It was set up by the government in 1990 and manages about $320bn (€235bn, £159bn).
It is invested almost entirely overseas and is overseen by the Ministry of Finance, although its operations are carried out by Norges Bank Investment Management, the fund management arm of the Central Bank of Norway.
The way in which it has been managed over the past 17 years has set Norway apart from the secretive - almost paranoid - attitudes towards sovereign wealth management employed by some other resource-rich states such as Saudi Arabia, Abu Dhabi and Dubai.
"We make no strategic investments," said Martin Skancke, director-general of the fund at the Ministry of Finance. "We invest in individual companies and sectors. We are invested in between 3,000 and 4,000 companies in 40 countries and average ownership of a company is below 1.0 per cent. We do not feel that this distorts markets."
Investment decisions are either made by individuals at the fund with specific investment mandates or are contracted out to external asset managers. At the end of 2006, 22 per cent of the fund was managed by 50 external managers with 80 different mandates.
Transparency is paramount. The ministry receives advice on the investment guidelines from the Central Bank of Norway. Consultants are also employed to help with this work as well as to judge performance and the management of costs.
Ministry officials report to parliament on all important matters relating to the fund, such as the size of the petroleum revenues, the outlook for fiscal sustainability, changes to the legal framework and investment strategy, the fund's performance, risks and costs.
The ministry also publishes the advice it receives from the central bank and external consultants, as well as an annual report listing all investments. The reports are published at press conferences and are webcast.
This pervasive attitude towards accountability and transparency is being combined with an increasingly aggressive attitude towards the management of the fund.
When it was set up, it was invested in the same way as the central bank's currency reserves, and it introduced equities into its investment universe only in 1998, with an allocation of 40 per cent of funds under management -- and the remainder in government bonds.
In 2000, five emerging-market countries were added to the equity benchmark and, in 2002, the fixed-income portion of the fund was permitted to invest in non-government bonds.
This year, it decided to increase its exposure to global equities from 40 per cent to 60 per cent, and said it would bolster investments in smaller listed companies, might invest in real estate and would also consider investments in private equity and hedge funds in coming years.
At the end of the day, it comes down to returns. The fund generated a 7.9 per cent return in local currency terms in 2006 and, since 1997, the average annual nominal return has been 6.5 per cent.
The lesson from Norway is that markets do not have to be distorted by massive investment funds and that diversification and transparency generate returns. With scrutiny of sovereign wealth funds increasing, even the world's most murky oil-rich dictatorship may soon start to find Norway's numbers and methodology alluring.
...............................................
— FT Syndication Service
WHEN Iraq's government was looking for advice on how to invest billions of dollars of future oil revenues in a way that would underwrite the nation's prospects without ruffling geopolitical feathers there was only one country it could turn to: Norway.
It was not alone. The Oslo government runs an official programme on how to run sovereign wealth funds and has worked with authorities in Kazakhstan, East Timor, Bolivia, the Faroe Islands and several African countries among others.
Norway sets the standards by which other sovereign wealth funds are judged, providing benchmarks for the transparent and accountable management of massive assets in a manner that does not distort the normal working of markets - and which generates decent returns.
With pressure on the World Bank and International Monetary Fund to impose guidelines on the way sovereign wealth funds are run, these institutions are also expected to turn to Norway for inspiration. Indeed, contact has already been established.
The task of managing Norway's oil wealth falls to the Government Pension Fund-Global (formerly known as the Government Petroleum Fund). It was set up by the government in 1990 and manages about $320bn (€235bn, £159bn).
It is invested almost entirely overseas and is overseen by the Ministry of Finance, although its operations are carried out by Norges Bank Investment Management, the fund management arm of the Central Bank of Norway.
The way in which it has been managed over the past 17 years has set Norway apart from the secretive - almost paranoid - attitudes towards sovereign wealth management employed by some other resource-rich states such as Saudi Arabia, Abu Dhabi and Dubai.
"We make no strategic investments," said Martin Skancke, director-general of the fund at the Ministry of Finance. "We invest in individual companies and sectors. We are invested in between 3,000 and 4,000 companies in 40 countries and average ownership of a company is below 1.0 per cent. We do not feel that this distorts markets."
Investment decisions are either made by individuals at the fund with specific investment mandates or are contracted out to external asset managers. At the end of 2006, 22 per cent of the fund was managed by 50 external managers with 80 different mandates.
Transparency is paramount. The ministry receives advice on the investment guidelines from the Central Bank of Norway. Consultants are also employed to help with this work as well as to judge performance and the management of costs.
Ministry officials report to parliament on all important matters relating to the fund, such as the size of the petroleum revenues, the outlook for fiscal sustainability, changes to the legal framework and investment strategy, the fund's performance, risks and costs.
The ministry also publishes the advice it receives from the central bank and external consultants, as well as an annual report listing all investments. The reports are published at press conferences and are webcast.
This pervasive attitude towards accountability and transparency is being combined with an increasingly aggressive attitude towards the management of the fund.
When it was set up, it was invested in the same way as the central bank's currency reserves, and it introduced equities into its investment universe only in 1998, with an allocation of 40 per cent of funds under management -- and the remainder in government bonds.
In 2000, five emerging-market countries were added to the equity benchmark and, in 2002, the fixed-income portion of the fund was permitted to invest in non-government bonds.
This year, it decided to increase its exposure to global equities from 40 per cent to 60 per cent, and said it would bolster investments in smaller listed companies, might invest in real estate and would also consider investments in private equity and hedge funds in coming years.
At the end of the day, it comes down to returns. The fund generated a 7.9 per cent return in local currency terms in 2006 and, since 1997, the average annual nominal return has been 6.5 per cent.
The lesson from Norway is that markets do not have to be distorted by massive investment funds and that diversification and transparency generate returns. With scrutiny of sovereign wealth funds increasing, even the world's most murky oil-rich dictatorship may soon start to find Norway's numbers and methodology alluring.
...............................................
— FT Syndication Service