I’ve given Norway’s SWF a bit of a hard time over the past few years for not taking more advantage of its long-term time horizon. My view is that the largest SWF in world (which claims to have an “infinite” time horizon) should be able to make very solid returns in the world of illiquid assets. However, to date, the fund has been (overly) conservative, preferring traditional asset mixes and ignoring illiquid assets, such as private equity and infrastructure.
Well hold onto your hat, people; that’s all about to change!
Bloomberg is reporting that former central bank governor Svein Gjedrem will replace Tore Eriksen as chief advisor to the MoF on the oil fund’s investment rules. Why is that a big deal, you ask? Because Eriksen was hyper conservative about investment policy. He was, a least to a certain extent, the man behind the fund’s conservative investment approach. Here’s a recent quote from Eriksen:
“…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…It’s much more complicated to invest in properties, in infrastructure than in equity and bonds, which you can buy every day on every market.”
Ugh. OK. Yes, Mr. Eriksen, what you say is technically true; investing in infrastructure is more complicated than buying a stock on the exchange. Buuuuut, with over $570 billion in assets under management, I’m pretty sure you could find the resources to deal with these new complexities. Think of it as an investment in the organization that will pay dividends in the long run. Parking half a trillion dollars in short-term, volatile, liquid securities is not always preferable to investing in real assets. Trust me.
Anyway, Gjedrem is a totally different type of player. In fact, while he was running Norges Bank, he was pushing Eriksen to let NBIM expand into more illiquid assets. So now that Gjedrem has Eriksen’s job, things are most assuredly going to change. How can I be so sure? Read this blurb taken from a letter Gjedrem wrote to the MoF while at the central bank:
“We [have] recommended that the fund’s investment universe should be expanded to include less liquid investments in private equity and infrastructure, as well as real estate…Investments in real estate and infrastructure confer direct ownership of real assets and an expected return in the form of stable, inflation-adjusted cash flows. This inflation adjustment comes from the periodic income from these investments often being linked to movements in inflation. An increase in this type of real asset in the portfolio should be aimed at, because this can help reduce uncertainty about developments in the fund’s international purchasing power…The fund is well-suited to bearing the risk and harvesting potential gains from investments in less liquid assets, as the fund does not have short-term liquidity needs. Nor is the fund subject to rules that could require adjustments to the portfolio at inopportune times…Investments in traditional infrastructure projects would, in portfolio terms, be expected to contribute stable, inflation-adjusted cash flows and so help safeguard the fund’s long-term international purchasing power. Any investments in infrastructure would consequently be part of the asset class of other real assets.”
That’s music to my ears. Here’s hoping Norway’s fund gets a bit more aggressive in the coming years.