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Strategy for Norway's Pension Fund Global

Raw, Online

Yale School of Management
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The September 2013 electoral victory of a center-right coalition after eight years of Socialist rule promised to bring changes to Norway, including to the country’s vaunted sovereign wealth fund. Erna Solberg, the leader of Norway's Conservative Party and the country’s new prime minister, had promised to review the fund’s structure and policies. During the election campaign, she noted that the investments “might be too big to be handled by just one fund.” She added, "You could split it either on getting different handlers to compete better, or have different objectives for your investments in different funds. We’re going to explore it, develop and see if it’s a good idea."

Norway’s sovereign wealth fund (Norwegian Pension Fund Global [NPFG]) was the largest such fund in the world.* At the end of 2013, it was worth 5.4 trillion Norwegian kroner, $US 864 billion, roughly $172,000 for each of Norway’s 5 million citizens.

The NPFG’s existence and growth came from Norway’s long-term view of its petroleum revenues. The country’s political leadership founded the fund in 1996. Each year since then, the government set aside the profits derived from Norway’s North Sea oil fields, with the plan to withdraw only expected earnings, leaving the capital intact to benefit future generations. To accomplish this goal, the governments had instituted a spending rule to take only 4% of the NPFG’s assets each year to help fund the country’s current operations.

In terms of governance, the Norwegian parliament, the Storting, set the fund’s investment policy, while the NBIM (Norges Bank Investment Management), an arm of the country’s national bank, ran the day-to-day operations. The political establishment had insisted that the fund be run in a highly transparent manner. In general observers noted that the NPFG operated under far more stringent investment guidelines and reporting requirements than any other country's sovereign wealth fund.

The NPFG was unusual among its peers in that it invested primarily in publicly traded securities and took broad positions in securities markets. At the end of 2013, the NPEG held 60% equities, 5% real estate and 35% fixed income securities. By mandate, all of the fund’s investments were outside Norway. The policy intended to protect Norway’s currency against large swings in foreign exchange earnings generated by the petroleum industry. The restriction to foreign investments also minimized the potential of using the NPGF’s investments for domestic political purposes.

The Ministry of Finance also insisted that the NPFG be operated under strong guidelines for responsible investing. The NPFG was required to exercise its ownership rights and play an active role in the companies in which it invested. In addition, the Ministry of Finance had excluded a list of around 50 companies from the NPFG’s investment portfolio for ethical reasons.

In early 2014 the government began to consider new options for the NPFG. The 2008 losses in the Fund's investments and slow recovery had raised concerns in the country. The new government's call for greater infrastructure investments, a stronger social welfare network, and lower taxes led some observers to question whether the government would call for larger withdrawals from the fund. New political priorities heightened awareness about the fund's role and raised questions about the Fund’s strategy, management, and ethical investment guidelines. In particular, Norwegians wondered:

* What was the appropriate investment strategy for the Fund? Should the fund focus on passive, indexed investments? Should it change its allocation of funds to a wider set of assets, or keep its investment focus on stocks and bonds, with a small proportion of other investments? Should it take a more active stance in the companies in which it invests?

* How should the fund execute this strategy? Should it develop investing expertise in-house or should it outsource it? Does it have (or could it hire) the kinds of employees that it needs?

* What role should ethical investment considerations play? Were investment decisions made on criteria other than expected returns limiting the fund’s ability to earn appropriately, either through choice of investment vehicles or expenditures required to participate in shareholder issues? What should the NPFG’s stance be on investing in companies developing coal, oil, gas and other petroleum products?

* Has setting the oil wealth aside, rather than bringing it into the economy, allowed Norway to avoid the "Dutch disease" of ruining the country's economy with wealth, or has the great wealth still reduced the incentive for Norway to experience the initiative, enthusiasm, and competitive spirit to move ahead?

Published Date: 08/05/2014

Suggested Citation: Jean Rosenthal,  William N. Goetzmann, Olav Sorenson,  Andrew Ang,  Jaan Elias, "Strategy for Norway's Pension Fund Global," Yale SOM Case 14-009, May 8, 2014

Keywords: Norway, Pension, Women in Leadership