Norway's $890 billion oil fund, the biggest of its kind, needs an overhaul to boost its long-term performance and preserve wealth for future generations long after North Sea energy income has dried up, its chief told Reuters.
The fund should gradually scale down the share of its holdings in bonds, which are producing near zero real returns, in favour of assets such as infrastructure and property, and emerging markets including China, chief executive Yngve Slyngstad said in an interview.
In a revamp that could span many years, the fund - which owns 1.3 percent of global shares - will play a more active role in its biggest investments, he said.
It also wants to expand beyond listed stocks into startup companies and those undergoing restructuring after running into trouble, said Slyngstad, who took the reins in 2008 just as the global financial crisis wiped out nearly a quarter of the fund.
Built from oil and gas tax income and acting like an endowment for the nation, the fund manages $175,000 for each of Norway's 5.1 million people and could grow to $1.2 trillion by the end of the decade, according to projections in the government's budget.
However, performance has fallen short of the government's expectations over the years. With its big bond portfolio a major obstacle to better returns, Slyngstad said he would ask the government for permission to cut it over time to 20 percent of the total from 35 percent now.
"By being invested in bonds, it is quite certain that on a long-term horizon you won’t protect your purchasing power," said Slyngstad, an Oslo native with a goatee beard.
"We have a 4 percent real return expectation from the government. If you add in two percent inflation, then that’s a 6 percent nominal return," he said. "You will not get that in the bond market in the foreseeable future ... We now have a real return in the bond market that is uncomfortably close to zero."
Although the fund has more than doubled in size under Slyngstad, its real annual return has been 3.6 percent since it was set up in its present form in 1998, drawing criticism that it is too focused on Europe and missed exceptional growth elsewhere.
Slyngstad - who once retreated to a cabin for six months to study the works of the German philosophers Heidegger and Hegel - said the fund's job is to capture global growth well beyond its traditional European base.
Cutting the bond portfolio will take years but the fund has already shortened the duration of its holdings and moved heavily into some of the biggest emerging markets.
The fund has prepared for when global interest rates, held by central banks at ultra-low levels since the financial crisis, start moving back up towards more normal levels.
"We have a slightly shorter average maturity in our bond portfolio than the market because there is exceptional monetary policy in place, which at one stage should end, if it’s exceptional," said Slyngstad, who was the fund's head of equities before taking the top job.
"Rather than looking at where the debt is issued and in what currencies, we’re starting to look at what the global GDP looks like," he said. "That’s why our bond holdings in countries like Mexico and Brazil are becoming quite large."
In China the fund has just $1.5 billion, a tiny figure compared with the size of the economy, and Slyngstad said he was keen to increase this once the Beijing authorities ease restrictions on foreign investment.
REAL ESTATE, EQUITY
Slyngstad said real return assets such as property and infrastructure are needed to balance the bond and stock portfolios. However, the infrastructure market's relative immaturity is an obstacle.
"To go into an asset class, it has to be quite large, so for now the market itself is the constraint," Slyngstad said. "The UK, Australia and Canada have the longest history, the longest tradition and the most competence (for infrastructure governance), so it’s more likely that initiatives in these countries will develop first."
Only 1.2 percent of the fund's assets are in real estate and it expects to increase that by one percentage point each year over the next three years. Slyngstad declined to say how big the holding would eventually grow. For now its mandate is up to 5 percent, but he added that a balanced global fund would keep 20 percent in the property market.
In equities, the fund could also expand the scope of its activities to unlisted firms even though it prefers companies quoted on stock exchanges because they were more transparent, Slyngstad said.
“It will be natural for us over time to participate more in the full lifecycle of a company, whether it’s early start ups, before they are created, or when it’s off the exchange in a difficult situation, restructured and going back again," Slyngstad said.
“Private equity is just equity. It looks different because it’s more leveraged and not priced every day. But it’s the same thing," Slyngstad said. "We don’t regard private equity as a separate asset class."
GOVERNANCE
The fund also plans to build bigger stakes in individual companies and plans more involvement with the firms to maximise returns and tackle governance issues such as protecting workers'
rights and the environment.
It has already put pressure on cotton seed producers in India and cocoa producers in west Africa to stop employing children and sold out of many Malaysian palm oil producers due to environmental concerns.
"We typically identify 400-500 companies in our portfolio that are especially exposed to various governance issues, whether it's child labour, water management or other issues," Slyngstad said, declining to name any of the firms.
It also expects to have 2,600 direct meetings with companies and plans to take a bigger role in nominating board members at firms where it is among the top shareholders, Slyngstad said.
"If we are exceeding 5 percent ownership, we expect to be involved in the (board) nomination process to assure ourselves that it’s a good process," Slyngstad said.
Source: Reuters
The fund should gradually scale down the share of its holdings in bonds, which are producing near zero real returns, in favour of assets such as infrastructure and property, and emerging markets including China, chief executive Yngve Slyngstad said in an interview.
In a revamp that could span many years, the fund - which owns 1.3 percent of global shares - will play a more active role in its biggest investments, he said.
It also wants to expand beyond listed stocks into startup companies and those undergoing restructuring after running into trouble, said Slyngstad, who took the reins in 2008 just as the global financial crisis wiped out nearly a quarter of the fund.
Built from oil and gas tax income and acting like an endowment for the nation, the fund manages $175,000 for each of Norway's 5.1 million people and could grow to $1.2 trillion by the end of the decade, according to projections in the government's budget.
However, performance has fallen short of the government's expectations over the years. With its big bond portfolio a major obstacle to better returns, Slyngstad said he would ask the government for permission to cut it over time to 20 percent of the total from 35 percent now.
"By being invested in bonds, it is quite certain that on a long-term horizon you won’t protect your purchasing power," said Slyngstad, an Oslo native with a goatee beard.
"We have a 4 percent real return expectation from the government. If you add in two percent inflation, then that’s a 6 percent nominal return," he said. "You will not get that in the bond market in the foreseeable future ... We now have a real return in the bond market that is uncomfortably close to zero."
Although the fund has more than doubled in size under Slyngstad, its real annual return has been 3.6 percent since it was set up in its present form in 1998, drawing criticism that it is too focused on Europe and missed exceptional growth elsewhere.
Slyngstad - who once retreated to a cabin for six months to study the works of the German philosophers Heidegger and Hegel - said the fund's job is to capture global growth well beyond its traditional European base.
Cutting the bond portfolio will take years but the fund has already shortened the duration of its holdings and moved heavily into some of the biggest emerging markets.
The fund has prepared for when global interest rates, held by central banks at ultra-low levels since the financial crisis, start moving back up towards more normal levels.
"We have a slightly shorter average maturity in our bond portfolio than the market because there is exceptional monetary policy in place, which at one stage should end, if it’s exceptional," said Slyngstad, who was the fund's head of equities before taking the top job.
"Rather than looking at where the debt is issued and in what currencies, we’re starting to look at what the global GDP looks like," he said. "That’s why our bond holdings in countries like Mexico and Brazil are becoming quite large."
In China the fund has just $1.5 billion, a tiny figure compared with the size of the economy, and Slyngstad said he was keen to increase this once the Beijing authorities ease restrictions on foreign investment.
REAL ESTATE, EQUITY
Slyngstad said real return assets such as property and infrastructure are needed to balance the bond and stock portfolios. However, the infrastructure market's relative immaturity is an obstacle.
"To go into an asset class, it has to be quite large, so for now the market itself is the constraint," Slyngstad said. "The UK, Australia and Canada have the longest history, the longest tradition and the most competence (for infrastructure governance), so it’s more likely that initiatives in these countries will develop first."
Only 1.2 percent of the fund's assets are in real estate and it expects to increase that by one percentage point each year over the next three years. Slyngstad declined to say how big the holding would eventually grow. For now its mandate is up to 5 percent, but he added that a balanced global fund would keep 20 percent in the property market.
In equities, the fund could also expand the scope of its activities to unlisted firms even though it prefers companies quoted on stock exchanges because they were more transparent, Slyngstad said.
“It will be natural for us over time to participate more in the full lifecycle of a company, whether it’s early start ups, before they are created, or when it’s off the exchange in a difficult situation, restructured and going back again," Slyngstad said.
“Private equity is just equity. It looks different because it’s more leveraged and not priced every day. But it’s the same thing," Slyngstad said. "We don’t regard private equity as a separate asset class."
GOVERNANCE
The fund also plans to build bigger stakes in individual companies and plans more involvement with the firms to maximise returns and tackle governance issues such as protecting workers'
rights and the environment.
It has already put pressure on cotton seed producers in India and cocoa producers in west Africa to stop employing children and sold out of many Malaysian palm oil producers due to environmental concerns.
"We typically identify 400-500 companies in our portfolio that are especially exposed to various governance issues, whether it's child labour, water management or other issues," Slyngstad said, declining to name any of the firms.
It also expects to have 2,600 direct meetings with companies and plans to take a bigger role in nominating board members at firms where it is among the top shareholders, Slyngstad said.
"If we are exceeding 5 percent ownership, we expect to be involved in the (board) nomination process to assure ourselves that it’s a good process," Slyngstad said.
Source: Reuters
