Focus on Norway not Cyprus
- March 20th, 2013
Investors are now focused on the drama in Cyprus. In contrast investors would do better to spend their time thinking about Norway. Why you ask? There are more investment lessons to learn from how Norway manages its oil wealth than trying to make decisions based on the latest news and rumors coming out of the Mediterranean.
Individual investors often make mistakes when they try and take an “institutional mindset” when it comes to investing. The fact of the matter is that institutions have very different goals and capabilities when it comes to investing. The same can be said of the attention paid to investment advice from billionaires, but that is a whole other topic.
This was illustrated most clearly with the wholesale interest in the “Yale Model” leading up to the financial crisis. As a general rule institutions have capabilities, access and expertise that individuals simply don’t have. That being said, there is one institution Norway’s sovereign wealth fund or The Government Pension Fund from which individuals could learn a great deal.
You may have missed a recent piece by Jason Zweig that appeared in the new WSJ.Money section a couple weeks ago that highlight the investment strategy (and relative success) of the country’s Government Pension Fund Global that invests the country’s money globally. It is recommended reading as is this longer one last year in the FT. Here are a few lessons I pulled from these pieces that I think are interesting and apply to putting together any investment strategy.
Now, let’s turn to Norway. Its huge Government Pension Fund Global keeps roughly 60 percent of its assets in publicly traded stocks (half in the U.S.), 35 percent in bonds and up to 5 percent in real estate…The Norway portfolio is “diversified in everything,” says Antti Ilmanen, an analyst at AQR Capital Management in Greenwich, Conn., who serves on the fund’s advisory board. (WSJ)
According to this strategy, equities should make up a fixed 60 percent share of the Fund. This implies that when equity markets fall sharply, the Fund buys more stocks to keep the equity allocation at the target level. This happened in 2002-2003 in the aftermath of the dot-com bubble and then again in 2008-2009 during the financial crisis. (Ministry of Finance)
Norway is mechanically disciplined. When stocks decline, the fund buys enough of them to get its holdings back to the 60 percent target; conversely, it buys bonds whenever their proportion of the portfolio falls below 40 percent. The fund “rebalances” this way to eliminate emotion from its decisions. (WSJ)
How much does the Norwegian portfolio hold in hedge funds? Nothing. Venture capital? Nada. Commodities? Zip. Private-equity funds? Zero. (WSJ)
The ministry argues that high management fees on private equity investments make the achievement of a satisfactory return from the asset class too uncertain. This is also the case for infrastructure, which is highly leveraged and where there is limited data on historical returns. (FT)
(T)he Fund stresses cost efficiency. There is only one consistent source of performance deviations from the benchmark; it is not stock and sector selection skill but cost drag. Investors would do well to control all elements of fee and cost inefficiency in their portfolios. (SSRN)
Transparency is a word often bandied about by investors. But few take it as seriously as Norway’s oil fund. Every year it publishes a list of all the investments it owns. (FT)
This short sample of what characterizes the “Norway model” is at best abbreviated and impressionistic. There is a longer paper that takes an in-depth look at the performance of the fund. The fund pursues a socially responsible mandate and actively pursues governance issues. From this perspective Norway’s model works for it. From a political and cultural perspective this approach has achieved a fair degree of consensus which allows the managers to invest with a high degree of confidence in its strategy.
You are clearly not Norway’s sovereign wealth fund in that you do not have a multi-generation time horizon. However there is a great deal to like in the Norway model. It’s investment strategy is simple, low cost, transparent, globally diversified and is rebalanced on a regular basis. For the vast majority of investors, individual and institutional, this represents a strategy that is both sound and something they can stick to over the long run.
Norway: The New Yale? (WSJ)
Investment: Norway’s nest egg (FT)
Norway wary of diversifying into alternatives (FT)
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