Norway’s Government Pension Fund-Global, Oslo, should better use its size, lack of liabilities and long investment horizon to its advantage, according to a report by the fund’s new independent Strategy Council.
The 3 trillion kroner ($494 billion) fund should diversify its equity portfolio to take advantage of value and liquidity risk premiums, sell insurance (both to financial markets, in the form of protection against financial catastrophes, and to traditional policyholders for natural catastrophe and other types of insurance), and bolster its contrarian investing based on valuation ratios, according to the report. All of the strategies would help the fund use its long investment horizon to pump up returns.
“Acting as an opportunistic liquidity provider or a contrarian investor not only serves a social purpose of stabilizing distressed markets, but should also enhance the investor’s long-run returns,” according to the report.
The Strategy Council is charged by the Norwegian Ministry of Finance to critically review the fund’s investment strategy in order to improve the strategy, increase transparency and encourage debate on important investment strategy decisions. This is the council’s first report.
The council, led by Chairman Elroy Dimson, emeritus professor of finance at London Business School, suggested in the report that “some exposure to infrastructure could be beneficial,” but stated council members are “circumspect about private equity, however, since we are concerned about the difficulty of hiring private equity managers who will, in aggregate, deliver acceptable after-costs performance.”
The council also recommended the fund review the geographical weights of its investments to bring them in line with market capitalization weights.
The report is available on the Norwegian Ministry of Finance’s website: http://www.regjeringen.no/en/dep/fin/aktuelt/nyheter/2010/strategiradet-2010--rapport.html?id=626455.