Giant Norwegian SWF sizes up active management

An external review is being carried out on behalf of one of the world’s largest sovereign wealth funds, the NOK2.47 trillion ($405 billion) Norwegian Government Pension Fund – Global, to determine whether active management should continue, with opinions sought from international experts in the UK and US.

Norway’s Ministry of Finance has appointed an international group of specialists to evaluate the experience of the SWF’s fund manager, Norges Bank, in active management, and has also asked the bank to prepare a more detailed plan for active management with descriptions of the main strategies for achieving excess returns.

The international group consists of Professors Andrew Ang from Columbia Business School, Stephen Schaefer from London Business School and William N. Goetzmann from the Yale School of Management.

In addition, international consultant Mercer has been commissioned to write a report on the use of active management and active ownership efforts in other large funds internationally.

In its report to Storting, or Parliament, on the management of Global, the Ministry announced that the evolution of the
scheme’s investment strategy would include an external review of the future of active management.

“The Ministry will in spring 2010 present the Storting with more information and an assessment of whether or to what extent active management of the Government Pension Fund – Global ought to be continued,” the report said.

The Report No.20 to the Storting notes that the Ministry assumes that financial markets are largely “efficient”, both at any given point in time and over time.

“With financial markets that are generally efficient, it is difficult for active managers to achieve a return in excess of the market return,” the Ministry wrote.

The fund achieved its biggest ever single quarter return of 12.7 per cent, 2.1 per cent above the benchmark, in the second quarter.

In a letter from Norges Bank to the Ministry in March the bank said that now that the fund’s investment universe and benchmark portfolio were gradually being expanded, “there is growing exposure to markets where there is little reason to expect the efficient markets hypothesis to hold. This increases the potential to add value through active management”.

The Ministry said the evolution of Global’s investment strategy ‘may result in asset allocation that is more similar to the composition of other international funds’.

At the moment the Government Pension Fund has an asset allocation split approximately 60 per cent equities and 40 per cent bonds.

“A basic premise in the work to evolve the strategy is the need for adequate limits on other types of risk than market
risk as well, such as operational risk,” the report noted.

“Another requirement will be the need for follow-up of the operational management that helps ensure that the interests of the managers are aligned with the objective of the general investment strategy
for the fund.”

Meanwhile, Norges Bank Investment Management (NBIM) has formed a new executive team as part of the final phase of
an organisational overhaul that started with the appointment of Yngve Slyngstad as chief executive officer in January 2008.

Extensive changes were made in 2008, with the integration of a number of functions which were previously separated
between equity and fixed income management. In addition, risk management was strengthened and fixed income management was restructured.

The new management team of nine includes Slyngstad, Stephen A. Hirsch as deputy chief executive officer, Bengt O. Enge and as chief investment officer.