Norway’s $570 billion oil fund may get more leeway to expand into new asset classes such as roads, gas pipelines and unlisted shares as the government switches its top adviser for setting the investor’s guidelines.
Svein Gjedrem this week started as secretary general at the Finance Ministry and chief adviser on investment rules for the oil fund, succeeding Tore Eriksen. The switch allows Mr. Gjedrem to revive proposals blocked by the ministry in April to expand the fund’s investments, according to Knut Anton Mork, chief economist at Svenska Handelsbanken AB in Oslo.
“Gjedrem is a person of very powerful ability of persuasion,” Mr. Mork said by phone. “The ministry will do what he wants. I see no reason why Gjedrem should have changed his view on this matter and against that background I expect the ministry to change course and allow for these new asset classes.”
Mr. Gjedrem, who declined to comment on how he will advise the ministry when contacted by e-mail, started his new job on June 11. He argued last year that the oil fund is “well-suited to harvest liquidity premiums from infrastructure and private equity investments,” in a report co-written with fund CEO Yngve Slyngstad.
Mr. Eriksen, by contrast, said in an interview last week that the fund needs to adopt a “conservative” approach and avoid “experiments” after it lost a record $116 billion at the height of the global crisis in 2008. The fund cut its Greek debt holdings in the first quarter, after last year raising its positions in bonds sold by Europe’s most indebted nations.
On Jan. 1, the range by which the fund can deviate from the benchmark it tracks was cut to 1 percentage point from 1.5 percentage points. The fund returned 9.6% last year as stock markets rallied, adding to a 26% gain in 2009. It grew 2.1% in the first quarter, the smallest return since the second quarter of 2010, as European bonds slumped.
The fund probably overtook Abu Dhabi’s Investment Authority to be ranked the world’s biggest this year, Cambridge, Mass.-based Monitor estimates. According to June rankings from the Sovereign Wealth Fund Institute in California, Norway’s wealth fund is the world’s second largest.
Since 1998, the oil fund has had an annualized, real return of 3.03%. The fund should take on more risk to help achieve its long-term target of 4% return, the government-appointed Strategy Council, led by London Business School Professor Emeritus Elroy Dimson, said in November.
Other wealth funds such as Singapore’s Temasek Holdings Pte. and Abu Dhabi are already investing in infrastructure and private equity to spread risk and boost returns. The Abu Dhabi fund, together with a group including Canada Pension Plan Investment Board, this month agreed to pay $3.2 billion for a 24% stake in Norway’s natural gas pipeline network.
The choice of adviser is likely to shape the oil fund’s investment decisions because “the permanent staff of the Finance Ministry is traditionally quite influential in setting operational rules,” Mr. Mork said.
While Mr. Gjedrem will be the ministry’s chief adviser for the fund, final decisions will be made at the political level by Finance Minister Sigbjorn Johnsen.
Mr. Eriksen wants his successor to avoid “rapidly increasing the investment universe further,” he said in the June 8 interview. The fund should eschew “too complicated asset classes and not experiment too much,” he said.
Mr. Eriksen, who will become Norway’s ambassador to the Organization for Economic Cooperation and Development in Paris in September, warned that “with a big fund there are a lot of management challenges and the more complicated we make the fund the more complicated the management will be.”
Europe’s biggest equity investor, which got its first capital infusion in 1996, is mandated to hold 60% in stocks, 35% in bonds and 5% in real estate. The fund first moved into stocks in 1998, added emerging markets in 2000 and this year bought real estate.