NBIM prioritises trading efficiency, AI and culture in three-year plan

Norges Bank Investment Management’s focus over the next three-years will target performance, technology and talent, and operational robustness. Monitoring portfolio managers, increasing trading efficiency and improving returns in real estate are also key priorities ahead for Norway’s NOK21 trillion ($2 trillion) oil fund, Government Pension Fund Global.

“The strategy sets out how we will work to become the best and most respected large investment fund in the world. We look forward to putting it into action over the next three years,” said chief executive Nicolai Tangen.

Strategy in equities will hone in on boosting trading efficiency and securities lending.

Equities comprise 70 per cent of the benchmark index and the strategy is shaped around market exposure and security selection (mostly managed internally) via enhanced indexing to systematically exploit inefficiencies and liquidity imbalances, and fundamental investing.

Trading the portfolio less, “better and smarter,” will help limit transaction costs. The renewed focus on trading will prioritise managing more trading flow internally before going to market, and extending holding periods when appropriate. It will also focus on closer collaboration between traders and portfolio managers, and taking advantage of new technologies and AI to further increase trading through automated algorithms. [See Inside NBIM’s AI playbook to hone investment edge and NBIM on AI cultural and organisational integration].

Securities lending is also a priority in the coming years. The team will continue to lend equities responsibly, seeking to capture more income from optimised collateral management and further diversification of counterparty relationships.

“Securities lending is countercyclical in nature, and we must be ready and willing to scale up when spreads widen,” states the fund.

Active security selection based on long-term thinking, better assessments of management quality, more knowledge sharing, and using AI to strengthen competitive advantages will become even more of a priority.

Expect NBIM to reduce exposure to companies it expects to underperform through a negative selection strategy, and integrate new mandates in developed markets to target managers with more flexibility to express negative views on companies in the benchmark index.

NBIM, which uses external managers in segments and markets where it believes they will enhance returns through specialised and local expertise it can’t replicate internally, will continue to search for the best external managers in emerging and developed markets.

“We will be disciplined and structured in internal capital allocation, prioritising investment mandates where we have high confidence that the decision-making process will continue generating excess return,” states the fund.

More automation in fixed income

In fixed income, the strategy will focus on automating fixed-income trading for all low-cost markets to increase efficiency and add value. NBIM will also boost investment in selected segments outside the benchmark to enhance return such as emerging market debt.

Fixed income accounts for 30 per cent of the benchmark and NBIM invests in a broad range of bonds issued by governments and related institutions, as well as companies, in a portfolio that seeks to dampen fund volatility, provide liquidity, and enhance returns via market exposure and security selection.

In the corporate bond portfolio strategy will focus on actively managing the portfolio to enhance return through issuer and sector tilts, while avoiding companies it expects to underperform. Strategy involves taking short- to medium-term positions based on fundamental research and temporary price differences of similar bonds.  NBIM also invests selectively in fixed-income segments outside the benchmark index as part of its allocation strategy.

Strategy in bonds and equities will continue to take allocation positions when abnormally large market dislocations create attractive opportunities. Such dislocations can occur when other investors are forced to act due to behavioural factors, regulatory requirements, or funding problems – exactly when NBIM argues its patient capital becomes most valuable.

Real estate to blur listed and unlisted allocation

In real assets, where NBIM is allowed to invest up to 7 per cent of the fund in unlisted real estate and up to 2 per cent in renewable energy infrastructure, the fund will focus on sector diversification.

It will increasingly delegate the operational management of the real estate portfolio, and gradually invest more through indirect structures.  Strategy will also blur the line between the listed and unlisted real estate portfolios to systematically evaluate whether listed or unlisted real estate provides the most attractive risk-adjusted return. NBIM will continue to invest in office and logistics, but also gradually invest more in newer and higher-growth sectors.

In energy and infrastructure, it will focus on expanding the portfolio to include a broader set of technologies and geographies. It will continue to invest directly in wind and solar power, and increase investments in distribution and storage as investment opportunities arise

Technology and data

Using data and AI to make better investment decisions will remain a key focus.

“We are all-in on AI, while recognising that success depends on teamwork not technology alone. Technology will augment our judgment, not replace it,” states the fund.

For example, NBIM will continue to develop its Investment Simulator to enhance investment decisions and provide feedback to portfolio managers. The tool will increasingly be used to make portfolio managers aware of their behavioural strengths and weaknesses.

NBIM seeks to cut manual processes in half  and will establish digital colleagues for routine tasks.

AI solutions will increasingly execute complex analytical tasks, and provide insights to enhance decision-making. Automation in real asset investment will also use AI tools to reduce manual burdens; speed up operations, and reduce the risk of potential errors.

Strategy over the next few years will also focus on culture. Staff must feel safe to go against the crowd and create mechanisms to challenge consensus thinking. Teamwork, feedback, intellectual honesty, and long-term thinking will be prioritised in a lean organisation, characterised by clear roles and collaboration to enable decisive action.

Direct engagement with companies will focus on governance, sustainable value creation, responsible business conduct, and robust risk management to enhance shareholder value, prioritising NBIM’s largest holdings and companies which hold the most significant risks.

NBIM will also continue to be the world’s most transparent fund.

“We place particular emphasis on increasing knowledge among the fund’s owners, the Norwegian people, to support informed public debate. This means being clear on what the fund is – and what it is not,” it states.