August 8, 2013 11:00 pm
For most savers, passive investing makes better sense than trying to beat the markets. For the world’s biggest sovereign wealth fund with $760bn or so of assets, passive is hardly an option. Norway’s steps to becoming a more active shareholder are logical – and may benefit other investors as well.
When Norway’s SWF received its first injection of North Sea oil revenue in 1996, it was a largely passive, index-tracking investor, which outsourced precise portfolio decisions to external investment managers. This made sense at the time. The amounts invested were relatively small. Investment expertise was still thin at the central bank – the fund’s institutional home.
A decade of high oil prices has changed all this. The fund now holds assets worth twice the country’s annual non-oil economic output. With about 60 per cent invested in equities, the fund owns on average 1.25 per cent of every listed company in the world. Its average stake in European companies is 2.5 per cent. Not to make use of the influence granted by this scale is to renounce opportunities both to do good and to do well.
The fund already looks after the former by having an ethics council screen the portfolio of companies deemed complicit in human rights violations and environmental damage. It will now expand its engagement with companies over social and climate concerns in addition to the crude tool of divestment.
The more consequential aspect of the more hands-on approach, however, could be in the corporate governance sphere. Norway’s SWF will use its heft to influence how the businesses it partly owns are run. It now sits on Volvo’s director nomination committee. It regularly votes for splitting the role of chair and chief executive at companies where these are combined, notably at JPMorgan.
Such activism has the potential to benefit everyone. The financial crisis – when bank shareholders remained unruffled by the risk their companies were taking on – showed that company performance depends on owners taking an interest in what management does. An investor such as Norway’s SWF is big enough to get the attention of executives – and of smaller shareholders who may follow suit.
Activism is no guarantee of good results: it must itself be exercised responsibly. The fund’s new panel of expert advisers (two of whom have links with this newspaper) is a good sign. It should also not be coy about when it applies pressure on companies. The promise of activism will only be undermined by suspicion about its motives.
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