When Yngve Slyngstad took the helm of the 2.549 trillion Norwegian kroner ($455 billion) Government Pension Fund-Global, Oslo, in December 2007, timing wasn't on his side. Market forces and external manager underperformance in 2008 contributed to a loss on investments of 23.3%, trailing the fund's custom benchmark by nearly 3.4 percentage points. But performance has picked up markedly in 2009 at Norges Bank Investment Management, manager of the giant oil fund that invests revenues of the sales of Norway's oil and natural gas reserves. The second and third quarters of 2009 were among the best on record and helped wipe out the relative underperformance in 2008. (NBIM internally manages most of the fund, within basic investment parameters set by the Ministry of Finance.) Returns were boosted by a well-timed increase in equities, to 60% from 40%, as the fund was able to buy shares at depressed prices and capture mean reversion in 2009, said Mr. Slyngstad, whose official title is CEO of NBIM.
The strong performance was well timed, too, as the Ministry of Finance nears completion of a three-pronged review of NBIM, including a look at whether — or to what degree — active management should continue at the fund. Asked about any contentiousness surrounding a Ministry of Finance proposal for stepped-up regulation of NBIM, Mr. Slyngstad demurred. “As far as I'm concerned we're in agreement on all the important aspects of that,” he said in a recent interview at his office within the Norwegian central bank in Oslo. “It's very much just reinforcing or spelling out what are already doing.” One favorable move might be the appointment of Sigbjorn Johnsen as finance minister in October. Mr. Johnsen held the same role from 1990 to 1996, when the fund was being formed, and served four years on the central bank board, which oversees NBIM.
How important have good returns been in the context of the Ministry of Finance's review? The return this year has come back more rapidly than we could expect and the whole discussion around the fund probably has been slightly changed by this massive return of good performance. We'll see, but I think through the short term everybody has realized that this fund has to be long term and evaluation of the fund has to take that into account.
Already in 2007, there was the realization that a fund like this can take more absolute risk than it had done. Since implementation happened through a two-year period, the realization now also is that certainly this fund is able to take more real risk, and therefore we have more degrees of freedom in a real economic sense, more ability to take on investment risk than what we thought. The question is how much of this risk is decided by the Ministry of Finance and how much can be taken by the manager of the fund.
So, contrary to what it may have looked like half a year ago, I think the conclusion by the end of year will be that ... (this portfolio) is so large that (it needs to have a long-term investment horizon). In one sense, the crisis has built a stronger consensus that (the fund) is built more like an endowment.
Does that mean you will invest more like an endowment? You can already see the first elements of that were put into place with moving from a 60% bond portfolio to a 35% portfolio, going from 40% to 60% in equities and from zero to 5% in real estate. It is quite likely that we will take a look at other asset classes as well.
If you look back, we've invested only in public markets. Will we have more invested in private markets? Yes, but not to the same extent as university endowments have.
How have recent relative returns affected your argument in favor of active management? (Both relative and absolute returns so far in 2009 have made up for losses in 2008.) That's a good result as the discussion is going to be more founded in unbiased points of view with regards to the recent history. ... if you have a long-term fund, you should have a situation where if you discuss it you can take away the emotions of a good year or a bad year. (But we can't predict what the Ministry of Finance's conclusion will be.)
In our advice to the Ministry of Finance, we'll recommend that we get the sufficient degrees of freedom to create a portfolio that has better risk-return adjusted characteristics in many dimensions of risk — liquidity risk, credit risk, equity market risk — and that in all these dimensions we try to offer a portfolio that is superior with regards to the sponsor's risk preferences.
So, do you consider the discussion on active management settled? We've been very clear the whole time that a pure passive index-replicating strategy is not something we can recommend to the Ministry of Finance, and we have both an advisory role and a management role. Coming from a central bank, that's a strong statement.
So I think it's more a question of the degree of active management, and in that question it may, as well, end up that the outcome of this discussion is that we should increase the level of our risk-taking rather than decrease it.
Do you believe the Ministry of Finance will agree that the total amount of risk should increase? What the Ministry of Finance has done is open a debate. Whether the outcome is that the Ministry of Finance wants more or less relative risk from our management we'll see in seven months' time.
We have the privilege of having a very sophisticated and thoughtful and long-term-oriented owner, so I am confident that the Ministry of Finance will choose a direction that is beneficial for the fund long term.
What are plans for external management, which has fallen to 13.5% of total assets as of Sept. 30 from 17% a year prior? As a percentage of the fund it's falling, but (the level of) assets under management (run) by externals has been quite stable the past two years, despite the fact that we did a major restructuring on the fixed-income mandates where we took away more than two-thirds of the mandates. I think that (the restructuring) is just a consolidation phase.
External management will also be very important for us in the future and we are awarding, at the current pace, more than one mandate a month. So, it's still a massive effort and we will continue to use external managers to a large extent in the years coming.
The largest change is that we have been awarding quite a few country mandates in smaller countries. We have been moving the external equity managers to try to somehow exploit the local competence and local information sources. In larger countries, we've been doing the same thing with small-cap mandates.
We currently run around 70 mandates (total), but I think we could run about 100 — probably not a lot more than that from a logistics point of view.
What about in alternatives? We don't call them alternative asset classes. The question is, can you access investment opportunities that you wouldn't be able to in the public markets. In the instance of real estate, that's quite obvious — 90% of real estate is not in listed real estate companies, so we have to go the private route. In infrastructure that also is quite obvious.
