Officials at the 2.59 trillion Norwegian kroner ($458 billion) Government Pension Fund-Global will consider a proposal to overhaul the Oslo-based fund's benchmarks into ones that mimic active strategies, a move that eventually could cut the need for external active managers.
Martin Skancke, director general of asset management at Norway's Ministry of Finance, said it was too early to say how revamping the benchmarks would affect external managers, but warned that the proposal won't be implemented any time soon, and that it could include use of some active strategies.
The proposal, which would affect both stock and bond investments, represents an effort to incorporate so-called “exotic betas” in the benchmark, and could be picked up by large funds beyond Norway, experts said. These benchmarks could be replicated through use of long/short strategies.
A trio of professors recommended in a report to the Ministry of Finance that the Norway oil fund create custom, completely liquid benchmarks onto which it would impose factor tilts, thereby capturing exposure to an array of systematic risk factors.
Those factors — sometimes called exotic betas — capture about 70% of the fund's returns from active management; therefore, active management returns “may be more cheaply replicated in-house,” said Andrew Ang, the lead author and professor at New York's Columbia University's business school, in a Jan. 20 seminar in Oslo that was simulcast online.
“I regard this as a very original proposal ... it's quite iconoclastic,” said Roger Urwin, global head of investment content at Towers Watson & Co., Reigate, England commenting on the report. “This is kind of saying a large part of the asset management industry is not needed.”
That's because a traditional active mandate — such as a global equity manager looking to provide 200 basis points better than a world stock index — would have no place in the proposed structure because most of its performance could be replicated by use of these factors.
“This is beta knocking on the door of alpha and becoming a bigger piece of the investment agenda of the next decade,” Mr. Urwin said.
“For a fund that currently uses passive benchmarks, this is a paradigm shift,” said Tristan Froidure, Paris-based managing director and head of research at quantitative “anti-benchmark” index provider TOBAM, commenting on the report in an e-mail to Pensions & Investments. “This approach will without doubt provide (Norway with) greater transparency (and) provide a greater accountability for active management, as factors that have in the past been a significant component of performance but were not included explicitly into the passive benchmark will now be recognized.”