Schumpeter \ ECONOMIST
More money than Thor
Changes to Norway’s gigantic sovereign-wealth fund will be felt around the world
Sep 14th 2013 | From the print edition
NORWEGIANS are different from you and me: they have more money. Norway’s general election on September 9th sounded many of the familia themes of elections everywhere. Erna Solberg, a Conservative, beat Jens Stoltenberg, the Labour prime minister, partly by offering a new face and lower taxes. But as Ms Solberg begins to run the country she will be confronted by a very different problem from most of her fellow world leaders: not how to make ends meet but how to manage abundance.
One aspect of this is an overheating economy. Disposable income grew at an average rate of 3.8% a year in 2008-12 compared with an OECD average of 0.8%. House prices rose by almost 6% last year. Workers are twice as expensive as the average in the neighbouring European Union. Ms Solberg must find a cure for “Dutch disease”: Norway’s booming oil economy is cornering the market in skilled workers and rendering its non-oil economy uncompetitive. And then there is the small matter of overseeing the country’s ever-growing sovereign-wealth fund.
The Government Pension Fund Global, as it is officially known, or the Oil Fund, as everyone calls it, is probably the world’s biggest sovereign-wealth fund. It is currently worth about $760 billion and is expected to grow to more than $1.1 trillion by 2020. The fund owns an average of 2.5% of every European listed company. It is a big shareholder in a raft of blue-chip companies, such as Royal Dutch Shell, HSBC and Apple, and has a 9% stake in BlackRock, the world’s biggest fund manager.
The fund is not weighed down by any particular liabilities, such as paying pensions (its name is misleading). This gives it lots of freedom to manoeuvre. Its governance is designed to be transparent and virtuous. Although overseen by Norway’s Finance Ministry, it is run day-to-day by the country’s central bank. An ethical-investment committee ensures it shuns firms regarded as inherently sinful (such as those making tobacco or weapons or employing child labour). It challenges the norm in the opaque world of sovereign-wealth funds by publishing its results in full.
More money than Thor
Changes to Norway’s gigantic sovereign-wealth fund will be felt around the world
Sep 14th 2013 | From the print edition
NORWEGIANS are different from you and me: they have more money. Norway’s general election on September 9th sounded many of the familia themes of elections everywhere. Erna Solberg, a Conservative, beat Jens Stoltenberg, the Labour prime minister, partly by offering a new face and lower taxes. But as Ms Solberg begins to run the country she will be confronted by a very different problem from most of her fellow world leaders: not how to make ends meet but how to manage abundance.
One aspect of this is an overheating economy. Disposable income grew at an average rate of 3.8% a year in 2008-12 compared with an OECD average of 0.8%. House prices rose by almost 6% last year. Workers are twice as expensive as the average in the neighbouring European Union. Ms Solberg must find a cure for “Dutch disease”: Norway’s booming oil economy is cornering the market in skilled workers and rendering its non-oil economy uncompetitive. And then there is the small matter of overseeing the country’s ever-growing sovereign-wealth fund.
The Government Pension Fund Global, as it is officially known, or the Oil Fund, as everyone calls it, is probably the world’s biggest sovereign-wealth fund. It is currently worth about $760 billion and is expected to grow to more than $1.1 trillion by 2020. The fund owns an average of 2.5% of every European listed company. It is a big shareholder in a raft of blue-chip companies, such as Royal Dutch Shell, HSBC and Apple, and has a 9% stake in BlackRock, the world’s biggest fund manager.
The fund is not weighed down by any particular liabilities, such as paying pensions (its name is misleading). This gives it lots of freedom to manoeuvre. Its governance is designed to be transparent and virtuous. Although overseen by Norway’s Finance Ministry, it is run day-to-day by the country’s central bank. An ethical-investment committee ensures it shuns firms regarded as inherently sinful (such as those making tobacco or weapons or employing child labour). It challenges the norm in the opaque world of sovereign-wealth funds by publishing its results in full.
The fund’s move in August to appoint a board to advise it on corporate governance was a sign
that it plans to take a more active role in managing its portfolio of companies—particularly those
in which it owns more than $1 billion-worth of shares or a stake of over 5%. This will mean
playing a bigger part in the appointment of directors; the fund’s boss, Yngve Slyngstad, recently
joined the nominating committee of Volvo Group, for example. It will also push companies to
improve their corporate governance and enforce high ethical standards. The fund is particularly
exercised about corporate tax avoidance. It was so impressed by the case made for long-term
investing in a recent British-government inquiry headed by John Kay that it has appointed Mr
Kay to sit on its corporate-governance committee.
This marks a big shift from the fund’s traditional passive investing focused on tracking global indices. But there will probably be more changes to come. The recent election campaign saw politicians ask some pointed questions about an institution that until recently was treated as above politics. Is the fund too big? Ms Soldberg suggested that she would consider splitting it up. “We are a party that believes in competition. If you have different bodies running it, you will have a little bit more competition to see who gets the best results.” Is it ignoring the immediate needs of Norwegians? The Progress Party, a populist party that could play an important part in the coalition that is now being cobbled together, complained that the fund is investing money abroad while Norway’s roads are crumbling. Is it ethical enough? Some NGOs want the fund to stimulate growth in the developing world or speed up the shift to a post-carbon future.
The case for these changes is far from compelling. When Sweden split up its pension fund the increase in management costs outweighed any improvement in efficiency. The last thing an overheating economy needs is for government to boost spending on roads and bridges. The fund’s basic obligation is to share Norway’s wealth across the generations rather than to solve the world’s problems.
Taking a hammering
It is harder to dismiss a recent coruscating paper on the fund by Sony Kapoor of Re-Define, a think-tank. Mr Kapoor’s central charge is that the fund’s average rate of return of below 3.2% a year is unimpressive. It is significantly less than the fund’s own expected rate of return of 4% a year. It is also lower than comparable sovereign-wealth funds such as Singapore’s Temasek.
Mr Kapoor says the fund has been too conservative. It invests over 90% of its portfolio in slow-growing mature economies rather than emerging markets. It focuses on public companies rather than alternative investments such as private equity or infrastructure projects. That means it fails to exploit its biggest advantage—the fact that it can invest for the long term. The fund also fails to diversify risk properly: three of its ten largest holdings are in oil companies and 10-15% of its overall portfolio is heavily exposed to the carbon economy. Mr Kapoor argues that the fund could please everyone—ordinary Norwegians who want better returns and NGOs that want more responsible capitalism—if it was only a bit bolder.
This marks a big shift from the fund’s traditional passive investing focused on tracking global indices. But there will probably be more changes to come. The recent election campaign saw politicians ask some pointed questions about an institution that until recently was treated as above politics. Is the fund too big? Ms Soldberg suggested that she would consider splitting it up. “We are a party that believes in competition. If you have different bodies running it, you will have a little bit more competition to see who gets the best results.” Is it ignoring the immediate needs of Norwegians? The Progress Party, a populist party that could play an important part in the coalition that is now being cobbled together, complained that the fund is investing money abroad while Norway’s roads are crumbling. Is it ethical enough? Some NGOs want the fund to stimulate growth in the developing world or speed up the shift to a post-carbon future.
The case for these changes is far from compelling. When Sweden split up its pension fund the increase in management costs outweighed any improvement in efficiency. The last thing an overheating economy needs is for government to boost spending on roads and bridges. The fund’s basic obligation is to share Norway’s wealth across the generations rather than to solve the world’s problems.
Taking a hammering
It is harder to dismiss a recent coruscating paper on the fund by Sony Kapoor of Re-Define, a think-tank. Mr Kapoor’s central charge is that the fund’s average rate of return of below 3.2% a year is unimpressive. It is significantly less than the fund’s own expected rate of return of 4% a year. It is also lower than comparable sovereign-wealth funds such as Singapore’s Temasek.
Mr Kapoor says the fund has been too conservative. It invests over 90% of its portfolio in slow-growing mature economies rather than emerging markets. It focuses on public companies rather than alternative investments such as private equity or infrastructure projects. That means it fails to exploit its biggest advantage—the fact that it can invest for the long term. The fund also fails to diversify risk properly: three of its ten largest holdings are in oil companies and 10-15% of its overall portfolio is heavily exposed to the carbon economy. Mr Kapoor argues that the fund could please everyone—ordinary Norwegians who want better returns and NGOs that want more responsible capitalism—if it was only a bit bolder.
That win-win argument may be a bit too good to be true. Yet, tellingly, the fund has started to
become more adventurous thanks in part to critical voices such as his. It is shifting more money
into emerging markets as well as becoming a more active investor. This may already be paying
off: the fund boasted its second-best year ever in 2012. Even before any reforms by the new
government, these changes are likely to have consequences for a remarkable number of the
world’s businesses.
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