ON THE EVENING of September 9, Prime Minister Jens Stoltenberg,
leader of the Labor Party, conceded defeat in the Norwegian
general election, paving the way for Erna Solberg, leader of
the Conservative Party, to form a new government. Although
expected, Stoltenberg’s departure ushers in an era
of change and uncertainty for Norway’s giant
sovereign wealth fund, the Government Pension Fund Global
(GPFG).
Throughout the hard-fought election campaign, Solberg, who
will head a right-wing coalition government beginning on
October 14 after Stoltenberg presents the budget, vowed to
consider alternative structures for managing
GPFG’s 4.5 trillion-kroner
($750 billion) asset pool, which is overseen by Norges
Bank Investment Management (NBIM), an arm of
Norway’s central bank. At an August 5 press
conference in Oslo, she told reporters that GPFG’s
assets "might be too big to be handled by just one fund" and
that her party would explore the idea of splitting them by
manager or objective to boost returns, which have not met the
government’s expectations. Currently, NBIM invests
the entire fund in equities (63.4 percent), bonds (35.7
percent) and real estate (0.9 percent). Solberg’s
concerns were echoed by the ultra-right-wing Progress Party,
which wants to go further and break off three smaller funds to
focus on renewable energy, foreign aid and domestic
infrastructure. These arguments resonated with voters. Forced
to respond, the government announced less than a week before
the polls opened that it would consider creating a dedicated
real estate fund using 10 percent of GPFG’s
assets.
It wasn’t the first time that
Norway’s sovereign wealth fund, the
world’s largest, had become embroiled in electoral
politicking. In the run-up to the 2005 national contest
— a contentious campaign that brought Stoltenberg to
power — voters expressed dissatisfaction with
GPFG’s management and demanded that more of
Norway’s oil revenue go toward financing tax cuts
and improving schools and hospitals.
To polish the fund’s image, the then-incumbent
government, led by Christian Democrat Kjell Magne Bondevik,
agreed to impose a set of ethical guidelines on
GPFG’s portfolio of investments. Soon after those
rules took effect, the fund made two high-profile exclusions:
Bentonville, Arkansas–based discount retail giant
Wal-Mart Stores and Phoenix, Arizona–based mining
company Freeport-McMoRan Copper & Gold.
In another move to curry favor with the electorate, before
the 2005 election the government passed legislation to rebrand
the fund, changing its name from the Norwegian Government
Petroleum Fund to Government Pension Fund Global to highlight
its importance in underwriting Norwegian public pensions and to
foster a greater sense of public ownership.
Although dividing GPFG would be the biggest shake-up in the
fund’s 17-year history, such a move is necessary
if the government wants to see above-market returns.
GPFG’s equity portfolio, which includes more than
7,400 companies worldwide, gives it the equivalent of a 1.25
percent stake in every publicly traded stock. With such a huge
portfolio, GPFG’s managers struggle to beat the
market, making the fund little more than a giant index
tracker.
As a result, the fund’s returns lag those of
its peers. GPFG has posted an inflation-adjusted annual return
of just 3.26 percent in the past 15 years, according to
international financial think tank Re-Define. That showing
falls well short of the Norwegian government’s
long-term 4 percent target and the performance of its peers.
The Abu Dhabi Investment Authority has achieved an annualized
return of 7.6 percent over 20 years. GIC (formerly Government
of Singapore Investment Corp.) gained an annualized 6.5 percent
during the same period; its ten-year annualized return is 8.8
percent.
The comparison may not be completely fair given that the Abu
Dhabi and Singapore funds each have more than three decades of
investment experience. But GPFG’s annual returns
also lag those of newer funds such as the New Zealand
Superannuation Fund, which was founded in 2003 and has gained
8.8 percent annualized since its launch.
As GPFG’s manager, NBIM appears to have
recognized this underperformance and sought to rectify it. In
2008, NBIM began pushing for the fund to be allowed to
diversify its portfolio into real estate and infrastructure. It
argued that as a long-term investor, GPFG is ideally positioned
to take advantage of the illiquidity premiums afforded by such
holdings.
The Storting, Norway’s Parliament, gave the
fund permission to make a 5 percent allocation to real estate
in 2008; three years later GPFG completed its first such
investment, buying a 25 percent stake of all commercial
properties on London’s Regent Street owned by the
U.K.’s sovereign property investor, the Crown
Estate, and forming the Regent Street Partnership. But NBIM has
yet to persuade the Storting to allow GPFG to invest in
infrastructure.
In 2009, NBIM instituted another initiative to drive retuns.
The value investing program seeks to imitate private equity by
allowing NBIM’s capital strategies team to take
stakes of as much as 10 percent in large publicly listed
companies and in firms planning IPOs that it considers to have
the potential for good long-term returns.
In addition to adjusting its asset allocation, NBIM has
started to intervene in its portfolio companies in an effort to
increase GPFG’s returns. In April, GPFG opted to
take seats on the director nomination committee of Gothenburg,
Sweden–based automaker Volvo, in which it owns a 4.5
percent stake, and in August the fund appointed a corporate
governance advisory board to help it take a more active role in
bigger portfolio companies.
Despite these activities, a Solberg-led coalition government
will want to change the fund’s structure. But that
change is more likely to be a slow-burning wrangle than an
overnight revolution. Norwegian politics tend to be more
consensus-oriented than those of other European countries. The
Conservative Party’s finance spokesman, Jan Tore
Sanner, has said that he’s keen to obtain
cross-party agreement for reforming GPFG.
Restructuring the fund probably won’t be a top
political priority — for now, anyway. The
Conservatives’ election campaign largely focused
on improving hospitals, schools and roads. Although the
Progress Party called for increasing spending by GPFG on
domestic health care, education and infrastructure, as part of
the new ruling coalition it’s already started to
tone down its rhetoric.
Recent macroeconomic indicators have helped quash talk of
using the fund for infrastructure upgrades: In August,
Norway’s underlying inflation rate rose to 2.5
percent, its highest level since July 2009, while the krone has
strengthened sharply against the U.S. dollar and the euro in
recent months. Both of these developments raise concerns that
Norway’s economy will struggle to stay competitive
and will embark on an overheating cycle that risks driving up
wages and rendering the country’s exports too
expensive — exactly the problems that GPFG was
established to prevent.
Consequently, Solberg has said that annual government
withdrawals from GPFG will stay at about 3 percent of the
fund’s yearly return rather than climb to the 4
percent limit. Such an increase would be the equivalent of a
fiscal stimulus of more than 2 percent of Norway’s
mainland gross domestic product, according to Tina Mortensen,
London-based economist at Citigroup Global Markets.
Change is surely coming to GPFG, but it won’t
be immediate. Still, asset managers in infrastructure, private
equity and real estate should be prepared for a shift in
Norway’s sovereign wealth fund investment policy.
When the fund starts allocating to new asset classes and
increasing the scope of its real estate holdings, the result
could be a torrent of money.
This cash will probably come with strings attached: The fund
continues be an activist investor and is seeking more bang for
its billions, demanding stellar performance and lower fees.
After all, the Norwegian public will be watching.