Norway’s global pension gamble
Yngve Slyngstad likens his first year in the job to that of steering a supertanker through what others have described as a “perfect storm”, characterised by tight access to credit, falling asset values and soaring commodity prices.
He always knew it would be a challenge, though he had not been prepared for exactly how choppy the waters would be.
It all came to a head earlier this month when it was revealed that Mr Slyngstad’s fund suffered a loss of more than $90bn (£61bn) last year.
The loss was so big, it wiped out pretty much everything Norway’s so-called oil fund had made since it started investing Norway’s oil and gas earnings in the global financial markets 12 years ago.
Critics were quick to point out that the hit was equivalent to a loss of more than $18,000 for every man, woman and child in the country – the exact people whose retirement wealth Mr Slyngstad’s 217-strong team were supposed to be safeguarding.
Mr Slyngstad is in charge of The Government Pension Fund of Norway – the second largest sovereign wealth fund in the world after that of the United Arab Emirate – having taken charge in January last year.
“We were already in the middle of the storm by then,” the 46-year-old lawyer, economist and social scientist recalls in an exclusive interview with the BBC News website.
Nevertheless, reactions to the losses were – perhaps not surprisingly – unforgiving.
Outspoken investment managers and opposition politicians accused Mr Slyngstad of gambling with and squandering the Norwegian people’s retirement funds, with some calling for his resignation.
Norwegian journalists, meanwhile, have criticised Mr Slyngstad for refusing to be interviewed there about the losses. Others have lashed out at a bonus structure that secured a bonus for nine out of 10 staff last year.
Rather than being despondent, Mr Slyngstad remains unapologetic. “Debate is healthy in a democracy,” he says, declining to take his critics’ comments to heart.
In part, his response could be seen as a reflection of how the oil fund is not merely there to bring in the bacon (it has a return target of 4%), but also to serve as a tool of Norway’s rather patriarchal foreign policy.
“As a large investor, it is our duty to contribute to good corporate governance,” says Slyngstad, pointing to how the fund steers clear of companies that use child labour, damage the environment or are active in certain parts of the arms industry.
Beyond tactical withdrawal from companies that do things it does not agree with, the Norwegian government also wants to use its economic muscle to reward firms whose activities it feels does good, for instance companies that invest in clean energy projects.
But beyond such concerns, Mr Slyngstad also vigorously defends his investment strategy in its own right.
“We are in a position where we can hang on to the investments for a long time,” he explains.
In other words, the fund is not having to realise last year’s losses by selling shares that have fallen sharply.
“What is important for the fund is whether these investments turn out to be good investments in the long run,” Mr Slyngstad insists, pointing to the way such long term positioning is beneficial as it helps stabilise markets.
Buying more shares
Rather than retrenching, Mr Slyngstad is preparing to pump billions more dollars into global stock markets.
He is loath to make predictions about the fund’s future size, pointing out that it all depends on what happens to energy prices – the fund’s job is to invest Norway’s oil and gas earnings, which will fluctuate depending on prices and volumes.
But according to calculations by the Norwegian bank DnB NOR Markets, funds under management are set to double, and then some, from $330bn to more than $880bn by 2014.
The oil fund is halfway through a process of realigning its portfolio by raising the equity portion from 40% to 60%, Mr Slyngstad explains.
“The fund’s role is to allocate capital to the most efficient actors in the market,” he says.
Currently, shares account for about half its investment portfolio.
“We are going to invest a great deal in the years to come,” Mr Slyngstad says, explaining that from June 2008 the government raised the limit on stakes in individual companies from 5% to 10%.
“These weak market conditions suit us better than many others.”
The realignment is taking place over time and does not involve the sale of fixed income investments, such as government bonds. “In reality, we’re still holding the same bond portfolio now as we did in 2007,” Mr Slyngstad says.
Instead, shares are acquired as and when the petroleum earnings come in.
“We set aside a bit of money every week,” explains Mr Slyngstad.
“During some periods we buy cheap, at other times we buy expensive,” he continues, insisting that this is a better strategy than any that tries to beat the market.
“We have had relatively limited equity stakes in the past,” though as part of the restructuring, the fund has also broadened its investment universe, Mr Slyngstad says.
And he points out that within Norway there is broad support for the strategic switch towards equities, both within the finance community and amongst politicians.
During the fourth quarter of 2007, the fund held shares in 2,500 companies around the world. It now owns shares in 7,900 firms – many of them relatively small – and their number is still rising.
Half of its equity investment is in Europe, where it aims to own about 1.5% of all shares by the end of 2009, Mr Slyngstad says.
That will be double the percentage of just over a year earlier, and over time the fund expects this to continue to rise.
Elsewhere in the world, the fund is increasing its exposure to the four Bric economies, Brazil, Russia, India and China, as well as to other emerging markets. “We have entered 19 new markets,” says Mr Slyngstad.
The fixed income part of the oil fund’s portfolio – which includes bonds – remains more troublesome.
Although the most spectacular part of last year’s giant loss arose from stock market investments gone awry, critics insist it was within its bond market division where the greatest errors were made.
Ahead of last year’s financial crisis, the fund’s fixed income investments were spread across the world, with some of it managed by 39 external money managers.
In retrospect, Mr Slyngstad reflects, it has become clear that positions that seemed diversified simultaneously fell victims to the credit crunch, and as such they tumbled together.
Subsequently, the number of external managers has been scaled back to just 12, though 13% of the fund’s total investments, both bonds and equities, will be managed externally.
In future, the fund will also invest less in the secondary bond market, which includes instruments such as US mortgage-backed securities which last year turned out to contain an unquantifiable exposure to the US sub-prime mortgage market.
But anyone who expects the fund to steer clear of all risk in the future should think again, Mr Slyngstad insists.
Large investors have a responsibility to make active investment decisions, even during tough times, he believes.
“You don’t turn around a supertanker just because of a passing storm.”
The Government Pension Fund of Norway comprises two separate sovereign wealth funds. One of them – dubbed the oil fund – invests the country’s oil and gas earnings overseas, the other on invests only in Norway.
By Jorn Madslien
Business reporter, BBC News
Friday, 27 March 2009
Source: BBC News