Instead, the fund is reconsidering technical but influential matters: chiefly benchmarks. Rather than relying on external indexes, it has been constructing its own. “You could either call it active management or thinking much more closely about what index you follow given the unique characteristics of this fund. What we have been doing the last three years is to spend a lot of time thinking about the benchmark construction,” says Mr. Slyngstad.
So one change has been to move its bonds benchmark away from being weighted according to the size of debt, as is traditional, to one set according to gross domestic product. That automatically increases its exposure to emerging markets and away from Europe. The finance ministry has also cut the regional allocation of all investments to Europe from 60 to 40 per cent.
Officials are cautious not to reveal too much, but one consequence of changing the benchmarks could be to increase the fund’s risk. “A natural question regarding the future development of the fund’s strategy is whether the special characteristics of the fund can be exploited to achieve a better ratio between expected return and risk,” Mr. Haugerud says. That could involve the fund providing liquidity at times of market stress and investing in smaller companies.
Mr. Slyngstad says the fund could move more in the direction of many hedge funds, which prefer to measure their performance on an absolute return basis rather than whether they did better than the market. “I think the most important thing here in the discussion on indexing is taking another look at relative to market [versus] absolute returns. We are just scratching the surface,” he says.
Still, friction remains between its long-term nature and its need to inform the Norwegian public in the short term on its performance. Every loss, such as in the second quarter because of difficult stock markets, is greeted by intense scrutiny from the Norwegian press.
But the criticism of its weak performance in 2008 has subsided after it more than recouped its losses in subsequent years.
And, for all the debate over how the fund is run, there remains a deep fascination in it abroad. Martin Skancke, Mr. Haugerud’s predecessor at the finance ministry, is now a consultant to sovereign wealth funds and has recently advised Libya and a country in sub-Saharan Africa.
With a mixture of disdain and admiration, another adviser to large public investors highlights the way the fund has shunned big investments, instead owning shares in 8,000 companies and about 4,000 bonds. While this undoubtedly shows the fund has awesome scale, it also calls into question whether it can act effectively as an active investor over such a range.
“What the Norwegian fund has become is this giant financial theory behemoth that is 60 per cent in equities, 35 per cent in fixed income and a desire to have 5 per cent in real estate. It spreads the money as thinly as it can across the world.”