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THE NORWEGIAN WEALTH FUND | NBIM

Norway is known for its stunning natural scenery. Still, an investment nerd cannot help but get drawn to the history, performance, and size of its financial hand-made masterpiece: the Norwegian Wealth Fund, also known as the Norwegian Sovereign Wealth Fund, the Norwegian Pension Fund (Global), or the Norwegian Oil Fund.

However, don’t expect to open your wallet and invest in it: it is not available to private investors. In fact, it is owned by the Norwegian government, it is funded through government oil revenues, and managed by Norway’s central bank (or, more specifically, by the Norges Bank Investment Management – NBIM), which reports to the Ministry of Finance.

Still, given its world-class management and transparency, we can dig into its contracts, deals, and allocations and learn much about its Equity, bonds, and Real Estate investments, its long-term strategy, and returns.

As of today (July-2024), the NMIB manages assets worth more than 17 trillion kroner (1.5 trillion USD, or 1,590 billion USD).

NBIM_Market Value

A Norwegian journalist once joked that the fund had reached such an incredible size that no one would notice if we removed a couple of zeros from it!

In reality, this is not the case. The fund aims to ensure responsible and long-term revenue management from Norway’s oil and gas resources so that this wealth benefits both current and future generations of Norwegians.

Norwegians look closely at its market capitalization, as it gives them a sense of solace and peace of mind, knowing their future is somehow secured. While the fund is owned by the state, and Norwegians don’t own shares or equity in it, the fund is managed on behalf of the Norwegian people. Therefore, looking at the fund’s total value per capita, each individual Norwegian feels like “owning” around 3.3 million NOK (315,697 USD). Sweet!

In a Ted X talk, Arendal (2021) titled “Why every Norwegian is a millionaire,”  the fund’s CEO, Nicai Tangen, commented that his work is to “safeguard the wealth for future generations.” [Internal note: they are millionaires in NOK, not USD]. 

Nicolai Tangen | Ted X Talk Arendal 2021

WHAT IS A SOVEREIGN WEALTH FUND (SWF) 

But what is a sovereign wealth fund? Is it unique to Norway?

A sovereign wealth fund (SWF), or sovereign investment fund, is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, and precious metals or alternative investments such as private equity funds or hedge funds. Sovereign wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or foreign exchange reserves held by the central bank.

As with Norway, a SWF is typically created when governments have budgetary surpluses. It is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate consumption. This is especially true when a nation depends on raw material exports like oil, copper, or diamonds. In such countries, the main reason for creating a SWF is the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.

SWFs in resource-rich countries are believed to help avoid the resource curse, which emerges when governments spend money immediately, overheating the economy. In such circumstances, saving money to be spent at a later stage is often desirable.

As market participants, SWFs can influence other institutional investors, who may see investments made alongside SWFs as inherently safer. This effect can be seen with increasing frequency, especially with regard to investments made by the Government Pension Fund of Norway (NBIM), Abu Dhabi Investment Authority, Temasek Holdings, and China Investment Corporation.

THE NORWEGIAN WEALTH FUND | ITS SIZE

When I saw NBIM’s figures, my first question was how the fund was able to reach such growth and dimension. With investments, size matters, and this fund, with 1.5 Trillion USD of Assets under Management (AUM), is simply huge!  In fact, it is reported as the world’s largest sovereign wealth fund, and the biggest owner of stock globally. 

list and Ranking of Sovereign Wealth funds_Sweat Your Assets
Table: Wikipedia. Data as of June 2023

THE NORWEGIAN WEALTH FUND | ITS HISTORY

The Norwegian government first transferred capital to the fund in May 1996. But there is a long, fascinating story behind it because things are never as easy as they sound. We must acknowledge the financial discipline of the founding fathers and of the politicians and managers who took over.

The idea of a Norwegian oil fund was first conceived as Prime Minister Einar Gerhardsen and his government claimed sovereignty over the Norwegian continental shelf. This laid the grounds for the Norwegian approach to petroleum resource management, based on parliamentary guidelines for responsible and long-term management, ensuring strong government control.

The search for oil began in 1966. During the next four years, 37 wells were drilled without success. On the last attempt, the day before Christmas Eve 1969, it was announced that oil was found in the Ekofisk field. To date, Ekofisk is still the largest oil field ever found at sea. In the early ’70, the government went through many negotiations to set up the best structure, governance, and framework to manage these resources. A key document was known as “the White Paper”, or “the 10 Oil Commandments.”

Still, only in 1983 did a report promise the creation of a fund where the government could store the current temporary rush of oil revenue and spend only a small % of the real return without touching the principal. Seven years later, in 1990, the Norwegian parliament passed a law establishing the Government Petroleum Fund. The plan regularly transferred capital from the government’s petroleum revenue to the fund.

The fund aimed to support the government’s long-term petroleum revenue management. It was set up to give the government room for maneuver in fiscal policy should oil prices drop or the mainland economy contract. It also served as a tool to manage the financial challenges of an aging population and an expected drop in petroleum revenue. The fund was designed to be invested for the long term, but in a way that made it possible to draw on when required.

According to its fiscal rule, the government can spend a long-term average of 3% of the fund’s value annually. This amount is designed to be less than the expected total net annual return. Such an inflow contributes up to 20% of the annual state budget.

From its first transfer of money in May 1996 to the end of 2023 (28 years), the fund received a net inflow total of 4,698 billion kroner (444 billion USD, being 15.8 billion USD per year), while the fund’s cumulative return was 8,592 billion kroner (813 billion USD). So, two-thirds of its value is returns on investment. Sweet! Commenting on this solid performance, Nicolai stated:

“we found oil twice: once in the continent shelf, and secondly in the capital market”!

While the fund’s website provides several tables and graphs, this Financial Times 2021 graph best represents the weight of Total Returns on the fund size (returns vs. inflow). 

NBIM Returns
Graph: Financial Times, 2021.

 THE NORWEGIAN WEALTH FUND | TOTAL RETURNS  

The fund seeks to achieve the highest possible long-term return with an acceptable risk. The fund has generated an annual return of 6.09 percent between 1 January 1998 and the end of 2023. The net annual real return on the fund is 3.83 percent.

We could immediately point out how the overall performance is not that outstanding. The management does not beat the market, the S&P500, with its total long-term average of around 9%.

However, as the fund clearly states, it has outperformed the benchmark index by [ONLY] 0.28 percentage points since 1998. How is this possible?

Well, the fund’s investments are measured against a benchmark index set by the Ministry of Finance based on indices from FTSE Group and Bloomberg Barclays Indices. The benchmark index is made up of global equity and bond indices. The equity portion of the benchmark index is based on the FTSE Global All Cap index and comprised 45 countries and 9,191 listed companies at the end of 2023. The fixed-income portion of the benchmark index is based on indices from Bloomberg Barclays indices and comprises 17,565 bonds from 2,398 issuers. Fixed-income investments are allocated 70 percent to bonds issued by the government and related institutions and 30 percent to securities issued by the corporate sector. 

It is important to recall that, due to its mission and size, the fund seeks returns with a relatively conservative and long-term approach. Looking at the most recent allocation, the funds invested 72% in equities, 26 % in fixed income, 1.8% in unlisted real estate, and 0.1% in renewable energy infrastructure. 

The fund also has a strong social and environmental mission. For instance, to promote energy transition, the fund does not divest from oil and gas but rather applies pressure from within—as a shareholder—to support energy transition. 

All these factors quickly explain why the S&P500 would not be a reasonable benchmark for the fund.

If I had to take an example outside the Wealth Fund Industry, the NBIM long-term public investment approach reminds me of the asset allocation and investment philosophy of Yale’s Endowment, designed by David Swensen. With David, I first understood the power of investing long-term for institutions built to last for centuries, and that doesn’t necessarily look at quarterly results!

THE NORWEGIAN WEALTH FUND | A GOLDMINE  FOR FINANCIAL EDUCATION 

It could be counter-intuitive at first to realize how public investors have limited room for investment maneuvering, not only due to their specific benchmark and risk appetite but also due to the “smaller pond” available compared to their volume of assets under management.

You and I can choose any investment or asset class and select the risk-reward that we feel like, the portfolio concentration, or even go wild and experiment, focusing on a specific geographic region, industry sector, or leading company. A public investor, specifically a public investor with such an immense inflow, assets under manager, and mandate, ultimately will struggle to allocate all its budget investments following long-term conservative guidelines while still trying to “beat” its benchmark. Given all these factors, in the words of the Norwegian Wealth Fund CEO,

“it is NOT what you are in; it is what you choose NOT to be in that really counts.” (Nicolai  Tangen, Ja-2024).

The funds, by design, invest in over 72 countries to achieve broad exposure to global growth and value creation and ensure risk diversification. The fund has a “small” stake in about 9,000 companies worldwide. On average, they hold 1.5 percent of the world’s listed companies: an amazing footprint and achievement for a country with less than 6 million people.

Given the fund’s size and its rather conservative and long-term approach, we can now understand why Nicolai Tangen states that beating the benchmark by 0.1% is already great and beating the benchmark by 0.5% is genius

One question came to my mind, though. What would be the job of their investment analyst? Wouldn’t it be sufficient to buy a bunch of index ETFs? Of course not. NBIM staff sit on the boards of these companies and actively vote based on the fund’s mission. They vote on more than 120,000 resolutions yearly at more than 12,000 annual shareholder meetings. When needed, they de-invest or reduce their stake in companies that don’t meet their standards or long-term sustainable goals.

What is truly amazing about the fund is the possibility of accessing its reports and its investment exposure by country, investment type (Asset Classes), Sector, and Year. Check out every single investment, and even see how they voted at every company.

THE NORWEGIAN WEALTH FUND | LESSONS FOR THE RETAIL INVESTOR

Despite its long-term public investment model, I still believe there is a lot to learn for a retail investor like you and me:

  • Make an automatic deposit of your revenues into an investment fund. Pay yourself first
  • Let the investment compound over time.
  • Select a benchmark that suits you. Is it the composite of stock, bond, and real estate? Is it total US stock? Is it total World Stock?  What is the expected risk appetite? What is the expected total return? 
  • Diversify your investments based on your horizon and appetite. Look for an asset allocation among stocks, bonds, and real estate. 
  • Protect the principal. You can withdraw a small percentage of your returns to cover a percentage of your annual costs. However, don’t touch the principal: don’t kill the goose of the golden eggs

 BOTTOM LINE

A couple of months ago, I discovered the NBIM website. Whenever I can, I dig deeper into its content. It is truly packed with amazing information, from reports, data, tools, videos. Its annual investment conference has amazing guests.

The podcast series in Good Company, where the NBIM CEO Nicolai Tangen has in-depth interviews with CEOs of some of the largest companies in the world, is truly inspiring and entertaining. So, give it a try. You will love it and learn a lot. 

 

If you like this introductory post on the Norwegian Wealth Fund, check out other Financial Wisdom in my Archive, YouTube videos, and Audio Podcasts.

Enjoy your financial journey. Sweat Your Assets!

Financial Wisdom + Discipline = Financial Freedom

 

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