Norway's $880 billion Government Pension Fund Global, Oslo, the world's largest sovereign wealth fund, said traditional global indexes are no longer an appropriate model on which to base its investments.
“A new framework for the management of the fund may facilitate a development where we as the management take greater responsibility by defining a tailor-made reference portfolio,” Yngve Slyngstad, the fund's CEO, said Monday in a speech in Oslo. The global indexes the fund currently follows don't “represent the best starting point,” Mr. Slyngstad said.
The sovereign wealth fund, which gets its capital from Norway's oil and gas wealth, is seeking to boost returns and expand into new asset classes. After getting its first capital infusion 18 years ago, the fund has steadily added risk, expanding into stocks in 1998, emerging markets in 2000 and real estate in 2011 to safeguard the wealth of Western Europe's largest oil exporter.
The fund, which owns 1.3% of the world's stocks, has missed a 4% real-return target since it started investing in the late 1990s. Since the establishment of Norges Bank Investment Management in 1998, the fund has had a real annual return of 3.75% and a nominal return of 5.83%, on average.
Global indexes have “tradability and liquidity” as their main criteria, Mr. Slyngstad said. The fund's strategic benchmark for equities is the FTSE Global All-Cap index, and it uses one made by Barclays Capital for bonds.
“Given that we don't have these liquidity returns and given that indices are created for macro consistency, we are saying explicitly that we are a different investor than the others and saying explicitly that we have a long-term horizon,” Mr. Slyngstad said. “Maybe we should consider the alternatives.”
“An obvious question is whether a greater share of the fund should be invested in less-liquid assets,” Mr. Slyngstad said. “Today, the fund's investment universe is restricted to public markets, with the exception of private real estate.” The proposed changes would be pushed through only after further analysis, Mr. Slyngstad said.
Norway's sovereign wealth fund is mandated by the government to hold about 60% in stocks, 35% in debt and 5% in real estate. It returned 192 billion kroner ($31 billion) last quarter, equivalent to 3.3%.
The fund is shifting its holdings to capture more of global growth and has steered investments away from Europe as emerging markets in Asia and South America increase their share of the world economy. It has weighted its bond portfolio according to gross domestic product, moving away from a market weighting to avoid nations with growing debt burdens.
