We all have our investing heroes, from barnstorming activists to nimble hedge fund managers to sage dealmakers. But rather than trying to emulate people like Bill Ackman, Ray Dalio and even Warren Buffett, you will do far better by focusing on Norway instead.
A number of observers have picked up on the success of Norway's Government Pension Fund Global as a highly successful investment fund with more than $650-billion (U.S.) in assets. The best part? Its refreshingly straightforward strategy makes it dead-simple for anyone to copy.
As Jason Zwieg pointed out in the Wall Street Journal earlier this month, its success is hard to ignore: Since 2000, the fund has gained an average of 4 per cent a year, which is double the return of the S&P 500 over the same period, after factoring in dividends. It is outgunning the Yale endowment fund, which used to wow spectators.
Abnormal Returns picked up on this theme this week, arguing that while the Norwegian fund has longer-term horizons than most individual investors, its approach is essentially the same: "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."
Here's the kicker: For all its impressive wealth and success, Norway's GPFG follows a course that looks as though it was lifted from a beginner's guide to investing. It divides its assets between stocks and bonds in a 60:40 split – with up to 5 per cent of the bond portfolio devoted to real estate.
It rebalances frequently, so that it will buy stocks when the 60 per cent equity allocation falls below the threshold, and it will sell stocks when the allocation rises above the threshold – an automatic way to buy low and sell high.
It stays very, very diversified, holding thousands of stocks in its portfolio. It shies away from big bets: Average ownership share is a mere 1.1 per cent of publicly traded companies. And it keeps costs low, with total annual costs ranging from 8 to 14 basis points – a steal by mutual fund standards, but not far from what a standard exchange-traded fund costs.
It stays clear of the fancy stuff that many institutional investors have grabbed in the hope of juicing their returns, including venture capital and private equity. It avoids commodities.
Yet, the fund does not avoid risk. Its equity portfolio plunged more than 40 per cent in 2008, sliding with the global financial crisis. It recovered soon after, though, largely through perseverance and rebalancing.
As it states in its strategy: "In the financial markets, investors who are willing to take risks are rewarded with higher expected returns. The aim for the management of the GPFG is thus not to minimize fluctuations in the fund's returns. Such a strategy would produce a significantly lower expected return."
Well, go figure. But for all the fund's apparent simplicity, it stands out as a freak among most other institutional funds. Its approach is being called the "Norway Model," and subjected to the rigours of at least one academic study – by David Chambers, Elroy Dimson and Antti Ilmanen.
One of their conclusions: "The fund emphasizes reducing risk through diversification, limiting itself almost exclusively to publicly traded securities. This approach is easily replicable."
The question is, why don't more of us look to Norway for our own portfolios?
David Berman