• Jinesh Sarat Sheth

Traveler’s Paradise Norway’s Journey From Oil To Oil Fund - Jinesh Sarat Sheth, Single Family Office

In the era of zero to negative rates; managing a defined benefit pension plan or even a hybrid plan is a major challenge for the best of CIOs in the world. Where, while chasing yield the fund manager would be tempted to allocate more to high yields, equities and alternatives; she has to draw a line of not compromising on the risk factors. In a low interest rate environment, which seems to be here to stay for quite a while; all long term investors having an investment profile similar to Pension funds would have to chase yield, therefore; managing risk would become absolutely indispensable. To understand the practicality and learn form it, let’s delve into the evolution of the asset allocation plan and the current investment philosophy of the largest sovereign fund of the world (i.e. the Norwegian Government Pension Fund Global https://www.nbim.no/en/).

Evolution of Asset Allocation since Inception (Journey from “an oil nation to becoming an oil fund nation”)

After one of the largest offshore oil discoveries during October 1969; massive revenue started to pour into Norway’s exchequer. On 22nd June 1990, the Norwegian parliament passed a legislation that the excess cash flows from oil & gas needs to be cautiously utilised; hence the Norwegian Government Pension Fund Global was created with a mandate to invest abroad. The idea behind this was that since one day they might run out of oil, this fund should create cash-flows to be able to replace the loss of revenues in order to provide a stability to the post-oil era of Norwegian Economy. The spending requirement has been linked to the expected return generated from the fund (in real terms the estimated spending is around 3%). Capital withdrawals are not usually permitted (the exception being crisis situation). Owing to spending discipline, within a span of 30 years the fund became worth more than USD 1 trillion; almost thrice the annual GDP of Norway.

Most of us won’t be surprised to witness the evolution of its asset allocation policy reflecting a consistent tilt towards equities since inception. However, some of us would certainly exclaim at the quantum of the shift to equities; which is a massive 3,000 basis points. (ref Exhibit 1) This validates that in an era of low yields, riskier assets would certainly find favour; which implies letting go of risk averse nature amongst investors to an extent.


The Ministry of Finance has set the following as benchmark for the fund:

Equity - FTSE Global All Cap Index (8,420 constituents as on 2019 end) Debt - Indices from Bloomberg Barclays Indices, comprising 14,516 bonds from 2,150 issuers. Process of Allocation

Referring the respective benchmarks, the fund manager creates a benchmark portfolio that corresponds to the gigantic size, ultra-long term time horizon, limited liquidity requirements and diversification benefits. This reference portfolio becomes the starting point. Although, the fund is managed actively but the Ministry requires the fund not to deviate significantly from the benchmark (hence it has mandated the maximum tracking error at 1.25%)

Asset Allocation since Inception (shows the shift of mandate from Fixed Income towards Equities)

Socially Responsible Investing

The focus of the Norwegian Government Pension Fund Global towards ESG can be understood from its 104-page Responsible Investment Report 2019; let’s look at the usage of words:

“climate” is mentioned 95 times (x);

“environmental” – 76x

“environment” – 23x

“sustainability” – 53x “sustainable” – 39x

“sustainably” – 32x “social” – 45x and “corporate governance” – 41x

Well, when the largest sovereign wealth fund in the world with assets over USD 1.15 trillion (As on 29th October 2020) talks at length about ESG (Environmental, Social and Corporate Governance); skeptics and critics be rest assured that ESG is not a fad. ESG in-fact would be a key driver in the philosophy of futuristic investment. These are not mere talks, we have seen the fund actually excluding companies that have violated human rights, companies involved in mining coal and exploring oil, producing tobacco, manufacturing nuclear weapons and causing severe environmental damage.

Full list provided here: https://www.nbim.no/en/the-fund/responsible- investment/exclusion-of-companies/

Allocation & Risk Exposure Mandate

Actual Asset Allocation (31st December 2019)

Equity Exposure

As per its annual portfolio disclosure as on 31st Dec 2019; it had 9,202 companies in its portfolio; geographically spread over 74 countries. No surprise that the top 3 holdings are global technology leaders.

Top 10 Equity Exposure

Sector Weighs

Financials, Technology and Industrial forms 51.5% of its Equity Portfolio I believe there is a potential to see a gradual increase in exposure towards Tech, Fintech and Consumers over longer run.

Top Sector Exposure

Fixed Income Exposure

57% exposure is towards Govt. Bonds; 24% exposure is towards Corporate Bonds; 12% exposure is into Government entities and balance is into Inflation linked and Securitised Bonds. Almost 42% is AAA; only 1.8% is below BBB.

Top 5 Fixed Income Exposure

Real Estate Exposure

Sectoral and Geographical Real Estate Exposure

Country Exposure

US, UK and Japan forms around 57% Weight; while its exposure to India is quite low at 1.2%. I believe the exposure to India is at a nascent stage and could potentially rise from the current levels.

Top 10 Country Exposure

Regional Exposure

North America and Europe forms the major exposure at around 76%; Asia exposure is quite low at almost 20%; given the fact that Asia forms the bulk of consumers and significant contributor to the GDP on PPP basis; I believe there is a potential to increase the exposure towards Asia from these levels.

Currency Exposure

Again not a surprise that USD and EUR forms almost 75% of its currency exposure.

Top 5 Currency Exposures

Performance Of The Fund Since 1998

Note: Data is in represented in Funds Currency Basket

The annualized return in USD is 6.31%


Norway; a traveler’s paradise - we might keep on admiring its breathtaking landscapes forever and yet our thirst for experiencing its natural beauty might never get fully quenched; there is yet another aspect that we need to admire as students of investments and that’s the discipline with which Norway has utilised its oil money. Not only large investors, but even a family office or a small investor can learn a lot from them. The moral of this case study would be that whenever we are blessed with excess money/ windfall we must not let go of our spending discipline; we should invest it cautiously and preserve it for times when we may not be left with excess. Whether in corporate life or personal life; efficient capital allocation always gets rewarded. As regards the asset allocation policy; I shall have to make one caveat, that is, the above study is just for the purpose of understanding the evolution of asset allocation, investment process, investment mandate and restrictions of the largest pension fund in the world; one must not try to completely replicate this in their asset allocation since the asset allocation policy of every investor is custom made purely based on the investors profiling and its financial & unique situation.

Sources: https://www.nbim.no/en, Annual Report & Responsible Investment Report 2019, Government Pension Fund Global (Norges Bank) Author: CA Jinesh Sarat Sheth, ACA, CFA - Investment Director - A Single Family Office based in Kuwait

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