Norwegian SWF to Add External Mandates

Terry Flanagan

The Norwegian Government Pension Fund Global, the world’s largest sovereign wealth fund, is adding external mandates as it moves into new markets and segments.

The fund was set up in 1990 to allow the Norwegian government to manage its oil revenues on a long-term basis. The capital is invested overseas to avoid overheating the Norwegian economy and to shield it from the effects of oil price fluctuations.

Norges Bank Investment Management manages the fund on behalf of the Ministry of Finance, which owns the fund on behalf of the Norwegian people. The ministry determines the fund’s investment strategy and defines the investment universe and the fund’s strategic reference index.

Last month in a strategy report for 2014 to 2016 Norges Bank Investment Management said the share of the fund managed by external managers will rise to 5% it expects to have 100 external mandates by 2016.

An NBIM spokesperson said in an email to Markets Media that it awards mandates to managers with specialist expertise in clearly defined investment areas.

“External managers may facilitate a move into new markets and segments, within both fixed-income and equity, supporting our overall strategy of a truly global, diversified portfolio,” added NBIM.

At the end of last year the the fund had 190bn Norwegian krone ($31bn), or 3.8% of its capital, under external management through 70 mandates managed by 59 external organisations. These included 50 country specific mandates for investments in emerging and frontier equity markets, 13 country specific mandates for investments in small-capitalisation companies in developed equity markets, five for environmentally related investments, and two for global emerging market debt.

The fund had two external fixed income managers at the end of last year – Templeton Asset Management and Pimco – according to its website. The external equity managers include Ashmore Equities Investment Management, BlackRock, BNY Mellon Asset Management, BTG Pactual Asset Management, Investec Asset Management, Old Mutual Investment Group and Schroder Investment Management.

“We use external equity managers for the majority of our emerging markets investments and for all our investments in frontier markets. External managers will also be used to complement our internal efforts in specific strategies such as investments in smaller companies and environmental mandates,” said the fund.

The strategy report said the Norwegian fund will increase its investment environmental portfolios, frontier markets, listed real estate and infrastructure.

New frontier markets will be added to the fund’s equity investments and the scope of fixed income will be expanded to include additional currencies. The fund said the new markets it enters will depend on investability, market opportunities and meeting minimum requirements for market standards. In the first quarter of this year the Norwegian fund invested in Croatia, Jordan, Kenya, Romania, Qatar, Oman, Slovakia, Tunisia and Vietnam.

The investment in environmental portfolios will increase 60% to Nkr50bn ($8bn) from Nkr31.4bn at the end of last year according to the strategy report while infrastructure will be a new investment.

In its strategy report the Norwegian fund said it is aiming to build a global, but concentrated, real estate portfolio.

The report said: “Our US investments will be concentrated in New York, Washington D.C., Boston and San Francisco. in Europe, investments outside London and Paris will be selectively extended. In the course of the strategy period we will also consider investment opportunities in global cities outside Europe and the US.”

The fund expects to invest 1% of assets in each of the next three years in private real estate as it develops its funding structure of absolute return strategies.

The spokesperson said real estate opportunities are evaluated on in-depth analysis of the assets’ expected net cash flow after tax and costs. “Our real estate investments will require in-depth knowledge and a local presence, and we will strengthen our market research,” the fund added.

The fund will increase due diligence as it begins to invests in fully owned properties to cover market, financial, legal, tax, operational, technical, insurance and environmental considerations.

In addition to adding external managers the strategy report said the fund will increase the number of its own specialist sector portfolio managers to 50 and to increase the number of significant holdings, more than 5% of a company, to 100 by 2016. The spokesperson declined to comment on the current number of sector portfolio managers or significant holdings.

By 2016 the fund expects more than half of employees to work at international offices. The fund currently has offices in Oslo, London, New York, Shanghai and Singapore and is not planning to open any new locations.

As the fund expands its investment strategy, it plans to extend its cross asset-system during the first half of the strategy period. Equity and fixed income trading are currently traded on different platforms acquired from external vendors such as Longview, Portware, Redi+ and Tradeweb.

An internal team analyses trading costs and all traders have systems that provides them with live feedback on expenses. “Monitoring and minimising trading costs is a key priority for us,” added the spokesperson.

Between 1998 and the end of 2013 the fund generated an annual return of 5.7%. The spokesperson said: “The long-term expected real return is around 4%. The fund is to be invested 60% in equities, 35-40% in fixed income and up to 5% in real estate (according to the mandate given by the Ministry of Finance).”

In the first quarter of this year the government fund returned 1.7%. Fixed-income investments returned 2% and equities 1.5%, which was 0.01% above the return on the benchmark indices. Real estate investments returned 2%.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, said in a statement: “All asset classes contributed positively to the result, and there were only minor differences between them. The return was boosted by lower interest rates in the fund’s main markets.”

The fund had a market value of Nkr 5,110bn at the end of the first quarter, of which 61.1% was invested in equities, 37.7% in fixed income and 1.2% in real estate.

Featured image via tashatuvango/Dollar Photo Club

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