Norway SWF Reveals 47 Billion NOK in Excess Return from Fund Managers
Posted on 04/16/2020
Norges Bank Investment Management (NBIM), manager of Norway Government Pension Fund Global, has published a review of our 20-year history of investing with external managers. In the first 20 years (1999 to 2018), the excess return has been 1.8% annually after costs or 47 billion kroner from the SWF’s external fund managers.
According to the press release, “Over the last 20 years, we have invested with 308 external active equity managers. A core tenet for us has been to keep our approach dynamic. It is essential to adapt processes and strategies to a changing world and to learn from experience. The types of mandates we have awarded have evolved over time – from regional and sector-specific mandates early on, to investments in emerging markets, small companies in developed markets and environment-related companies.”
“We have a thorough approach to selecting external managers and continuously reselect the managers. All parts of the selected investment firms are monitored and evaluated through regular meetings in their own offices, to ensure that the portfolio manager, investment team, management, compliance and operation personnel meet our requirements,” says Global Head of External Strategies Erik Hilde in the news statement.
NBIM first started with finding European regional mandates in the autumn of 1998 and broke out the allocation to Europe ex-U.K. and the U.K. NBIM awarded the first mandate in Japan in April 1999. In total, the sovereign wealth fund awarded mandates to eight different portfolio managers during the period, all based in Tokyo. NBIM awarded the first Asia-Pacific excluding Japan mandate in April 1999. In 2005, the Norwegian institutional investor decided to divide the Asian region into specialist mandates.
The first U.S. mandate was awarded in March 2000.
Norway GPFG embarked on fund managers in emerging markets in 2005 with single-country mandates in two of the largest markets, India and china, and an ASEAN mandate covering Indonesia, Thailand, Malaysia, and Singapore. NBIM entered Mexico and Chile in 2012. NBIM made the choice to not invest in global emerging markets mandates that invest across multiple markets, “where the emphasis is on allocating investments between different countries based on cyclical growth factors tied to the state of the economy, such as corporate earnings, interest rates and inflation. We have single-country mandates and look at long-term trends within the specific market. To be able to do this, we need managers with a deep understanding of the local market and of company-specific issues. We need someone who can construct a portfolio of carefully selected companies and avoid those with elevated valuations and poor corporate governance. by having single-country mandates for each of them, our attention is on long-term trends within the countries, and not on allocating investments between countries,” according to the report.
Sector Mandates
In 2000, NBIM began the search for sector specialists. NBIM searched for investment managers who could use deep industry insight to identify the beneficiaries of trends. The first of the sector specialist mandates were awarded in 2001 and it peaked to 28 mandates at one time. Some examples of these mandates are global healthcare, global financial, regional financial, and global technology mandates.
Environmental Mandates
In 2009, NBIM awarded 11 different environmental mandates. By 2018, NBIM terminated all external environmental mandates. The reasons include the challenge of finding a good benchmark, focus on specialist country mandates, and that the investments were a dual strategy with both internal and external mandates.
Separate Accounts
NBIM decided that each fund manager mandate would be in a separate account in the name of Norges Bank. This means that NBIM have never transferred any assets out of Norges Bank’s custody account, but simply given the fund managers the right to buy and sell shares in a separate account in Norges bank’s name.
According to the report, “Every year, all existing managers were re-selected. Outside the scheduled annual due diligence meetings, we would have regular update meetings with portfolio managers, and organisational changes or specific events could trigger a new full review at any point in the year. For example, if the information ratio, meaning relative return/relative volatility, fell below -1.5 since inception, an immediate due diligence.”