Visit the website of Norway’s oil fund and an extraordinary sight awaits. Several times a second, the value of the world’s largest sovereign wealth fund is updated. One moment this week, the fund gained $134-million U.S. in less than one minute, only to lose nearly all of it over the next minute.
This transparency is only one of the notable aspects of the fund, which has grown at a frantic pace since receiving its first sum of money – about $300-million – in 1996. It now has a value of more than $600-billion and owns 1 per cent of all global equities and, on average, 2.25 per cent of every listed European company.
The fund was created as part of Oslo’s effort, after discovering its first oilfield in 1969, to avoid “Dutch disease”: the curse that has blighted many of the world’s biggest oil producers with problems such as inflation and weak manufacturing.
It was also designed to manage its energy earnings over the long term, something that has caused some to talk of a “Norway model” in investment to rival the dominant method for big, public investors patented by Yale University. Yale’s model focused on investing in illiquid markets such as private equity and hedge funds, whereas Norway went for a simpler route: investing in thousands of different bonds and shares.
But with the fund’s rapid growth comes added scrutiny and challenges. Norway’s fund is expected to double again in the next decade to more than $1-trillion. Norway, the fifth-biggest oil exporter, experienced intense soul-searching after the 2007-08 financial crisis when the fund had a negative return of 23 per cent in just one year.
The Government Pension Fund Global, as it is officially known since it invests only outside the country, is currently grappling with just how active and aggressive an investor it should be given that its ultimate owners are the Norwegian people. That in turn places it in the centre of one of the investment industry’s biggest debates, leading some outsiders to ask: Can the oil fund really serve as a model to other investors?
The fund has grown faster and been more successful than anyone envisaged. Originally expected to last 30 years or so, the fund – now in its 22nd year – is expected by politicians to last for a century or more.
The Norwegian government has embarked on a program of cautious change. The fund receives booming petroleum revenues – with the government committed to spending no more than 4 per cent of the fund’s return annually – and started out investing only in government bonds.
Over time, it has been allowed to buy shares but never more than 10 per cent of one company, avoiding the big bets that many public funds take. It also has a large ethical dimension with the finance ministry forbidding it from owning certain sectors such as tobacco groups or companies such as Walmart, excluded six years ago because of labour practices.
Its current asset allocation is a highly traditional mix of 60 per cent in shares, about 40 per cent in bonds and a tiny percentage in property.
“It is important to have an investment strategy that has broad support,” says Pal Haugerud, head of the ministry of finance’s asset management division. “Over time we have developed the strategy from only European bonds to include equities, emerging markets and recently real estate. By doing this, gradually we think we have allowed broad support to be secured for the strategy.”
There are occasional calls from some politicians for the government to take more money from it. The central bank would prefer the government to take only 3 per cent.
Still, the role of the finance ministry and parliament in the fund’s strategy means there is a strong consensus behind its mission of saving wealth for future generations.
But by investing almost entirely in publicly traded securities, the oil fund acts in stark contrast with the much-followed approach of Yale University. Known as the Swensen model after its founder David Swensen, it has long been a favourite for long-term investors and seeks to invest in more illiquid assets.