That puts Norway at the heart of a heated debate on whether active or passive management makes the most sense. Passive investing merely seeks to mimic the returns of a market, often through an index-tracking fund. Active investors try to pick winners and losers, buying more or less of certain companies or assets.
Academics are divided on the merits of each approach. Because of their long-term nature, sovereign wealth funds and managers of endowments have been felt to be more suited to active management where they can try to boost returns by taking risks normal funds often cannot.
The oil fund, also known as Norges Bank Investment Management as it sits inside Norway’s central bank, bristles at suggestions it is anything other than an active investor. “We clearly think it’s not possible to call it passive investing,” says Yngve Slyngstad, chief executive of the fund, which has 320 employees.
Combined with the straightforward 60-40 split between equities and bonds, this more simplistic approach than Yale’s has supporters. David Chambers, Elroy Dimson and Antti Ilmanen – two academics and a fund manager all with close links to the oil fund – argue that the Norway model “might be a more suitable template for many other investors than Swensen’s Yale model” in a recent paper for the Journal of Portfolio Management. They contend the oil fund’s costs and managerial complexity are significantly lower and that its reliance on public markets makes it easier to forecast future performance compared with the unpredictability of illiquid assets.
But others disagree, arguing that the fund spread its interests so widely that it ends up with returns and a risk appetite in keeping with a passive rather than active investor. A striking report, commissioned by the Norwegian government after the financial crisis, concluded the fund was little more than a passive investor. It found that, statistically, active management had “an almost trivially small impact on the overall risk of the fund” and stated that “to a first approximation, the fund is actually not an actively managed portfolio.”
Similarly, Ashby Monk, a sovereign wealth fund expert who is a research director at Stanford University in the U.S., says: “In a way, it resembles a giant index fund.”
He adds that it may be a cost-effective way of managing money but that additional opportunities are being missed, largely because of the bureaucracy involved in running the fund.
Recently, the Norwegian finance ministry allowed the fund to invest in property. But the government has resisted the fund’s own pleas to invest in alternative assets such as infrastructure and private equity.
Mr. Monk says: “I expect that most people at NBIM recognize that, as a long-term, inter-generational investor, they should be allocating some portion of their capital base to infrastructure assets. But they’re currently not doing so. And as best I can tell that’s really just a function of the decision-making process and structure within the ministry sitting overtop NBIM. It’s slower than turning a supertanker.”
Mr. Slyngstad is somewhat weary of this debate. “The question of indexing or not indexing poses the wrong question,” he says in an interview.
Changes are under way. First, the allocation to equities was increased in 2007 from 40 per cent to 60 per cent. In 2008, the fund was permitted to buy shares in companies in emerging markets.
Property investments were also allowed, the first private market the fund could invest in. But despite prominent purchases such as in London’s Regent Street, it has been hard to boost the relative size of property in its portfolio as the fund has been growing by more than $50-billion a year.
Mr. Slyngstad adds that a similar argument limits its ability to invest in private equity and hedge funds where stakes are often quite small. “We are too large to make a significant allocation to alternative assets,” he says.