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Sovereign Wealth Funds

Norway appoints academics to review sovereign wealth fund portfolio

The Norwegian Ministry of Finance appointed two academics to assess the internal management of the Government Pension Fund Global, reviewing the strategies used by the manager and analyzing performance.

The expert group was appointed as part of regularly conducted broad reviews of the management of the 7.8 trillion Norwegian kronor ($980.6 billion) fund by Norges Bank, a Ministry of Finance news release said. The last review was completed in 2014.

The group, comprising professors Magnus Dahlquist at the Stockholm School of Economics and Bernt Arne Odegaard at the University of Stavanger, will prepare a report on its findings to be submitted to the ministry by January 2018.

In considering the active management of the sovereign wealth fund, the ministry expects five things from the group.

It wants an assessment of Norges Bank's current main investment activities in the management of the fund, and of the most significant investment strategies in the equity and fixed-income portfolios, said a document outlining the group's mandate. The assessment will include discussions of theoretical and empirical foundations; known risk and return characteristics; suitable evaluation horizons; and scalability of the activities and strategies.

The second requirement is an assessment of Norges Bank's active management results for the fund since 1998, with emphasis on the most recent years. The ministry wants quantitative analyses in accordance with leading academic standards using data looking at return, risk and cost. The ministry wants, as a minimum, an analysis of GPFG's ex-real estate performance relative to respective benchmarks set by the Ministry of Finance; and analysis and cost-benefit analysis of the main investment activities and most significant investment strategies within each activity for the equity and fixed-income portfolios.

The real estate portfolio will be assessed separately and will consider management since 2011. The group will discuss the chosen strategy and provide a quantitative analysis where real estate investment results within major markets are evaluated vs. benchmarks.

The fourth requirement is for an assessment of Norges Bank's "possibilities to obtain excess returns in the management of the GPFG relative to the current strategy benchmark."

The final request is for recommendations based on the review of management of the GPFG and including historical results, strategies and possibilities going forward. The ministry wants to know if the size of the relative risk budget or "expected tracking error limit" needs adjusting.

As part of the review, the Ministry of Finance also has commissioned two reports looking at management costs and responsible management activities in other large funds. The release said reports will be prepared within general agreements with McKinsey and Inflection Point Capital Management.

The fund had an asset allocation of 64.6% equities, 32.9% fixed income and 2.5% unlisted real estate as of March 31.