Norway’s SWF: beyond the consensus

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Norway has lots of oil and lots of money. That happy state of affairs carries risks. Ahead of a general election on September 9, a debate is raging over whether more of the country’s $750bn sovereign wealth fund should be spent on domestic investment. Meanwhile, outsiders are questioning whether the fund is extracting the best returns from its vast size and global presence. The answer to the first question is no. The second is more complicated.

Norway’s SWF – known as the Government Pension Fund Global – was set up in 1996 to provide for future generations. A maximum of 4 per cent of its income can be used for current purposes. The temptation is to raise that limit. It should be resisted. The fund already accounts for about 15 per cent of government revenue. Increasing the limit, as some politicians want, will simply make the budget too dependent on oil and gas revenues.

Other aspects of the SWF deserve scrutiny. Norges Bank Investment Management, the unit in the central bank that manages the fund, says it made a real return of 0.1 per cent in the second quarter – 0.3 percentage points more than its benchmark. That looks impressive. And since 1998 its average annual real rate of return is 3.1 per cent. Critics point out that this undershoots both the 4 per cent rule and global investors such as Calpers or Temasek.

Arguably, Norway’s SWF is set up to underperform. Its assets are split roughly 60/40 between equities and bonds. It had stakes in nearly 7,500 listed companies at the end of 2012. So it looks like both an index tracker and an indiscriminate fund manager. Moreover, three of its 10 biggest holdings are in oil and gas companies – odd for a vehicle aimed at balancing Norway’s dependence on oil and gas. It is changing: the proportion invested in Europe will fall to 40 per cent eventually, from 48 per cent last year. Investment in infrastructure will also likely rise.

Norway’s model for exploiting natural resources is exemplary. But to extract maximum value from that wealth requires going beyond the current consensus.

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