A seven-story office building in Oslo, landscaped with topiary and statues of acrobats, has become a magnet for economic policy makers from Beijing to Moscow. They come to the headquarters of Norges Bank, the Norwegian central bank, to learn the secrets of the country’s success in investing oil revenue without disrupting its own economy or foreign markets.
What makes the advice from Oslo valuable is Norway’s record of managing $356 billion and earning returns that exceed its own goals while publishing regular reports on its holdings and performance. Persuading Russia and China to do the same would help allay concerns among Group of 7 policy makers, who are meeting this week to draft global guidelines as government-controlled funds proliferate.
“There is a strong case for sovereign wealth funds to adopt the best practice of open funds like Norway,” said Gerard Lyons, chief economist at Standard Chartered Bank in London. Otherwise, he said, “there is a serious likelihood of Western governments and funds clashing over what they can buy and where.”
Morgan Stanley calculates that such funds may control $12 trillion within a decade as Russia, China and smaller economies like Iraq and Bolivia invest earnings from energy and other exports.
The big fear in the United States and Western Europe is that secretive management under government sponsorship may allow funds to seek out strategic industries or roil markets with unexpected gluts of cash. Such concerns could, in turn, prompt a spiral of tit-for-tat protectionist measures.
“This is becoming an issue, which could hamper global prosperity if we don’t solve it,” the European Central Bank president, Jean-Claude Trichet, said o. The G-7 policy makers that gathered in Washington in 2007 were looking for ways to head off that outcome. Norway’s model may prove attractive to both sides. “Just travelling or talking about these funds could be my full-time job,” said Martin Skancke, head of the Norwegian Finance Ministry’s asset management department, who has met with Chinese and Russian officials in the past year.
Norway, one of the world’s largest petroleum exporters, invests its oil wealth across 42 different markets and 31 currencies, the equivalent of about $75,000 for every Norwegian. Its pension fund is Europe’s largest and lags behind only that of the United Arab Emirates among those run by governments.
What makes it different from those in the Emirates and Singapore is the amount of information it makes public about its strategy and investments. Its performance and risk exposure are reported quarterly and its holdings in about 3,500 companies are detailed annually; in most cases, its investment in any company amounts to less than 1 per cent of available shares. Managers meet regularly with Parliament and reporters.
Great pension scheme
That means investors and other governments view the fund as posing no threat of increased volatility and as motivated by the bottom line rather than politics, said Knut Kjaer, who runs the fund from the central bank. “It’s very important for us that at all times we’re viewed as a professional investment organization,” Kjaer said. “We have never had a problem in markets because we manage a government’s financial asset.”
What may make Norway’s practices appeal to other countries are the returns its fund earns, even as it operates in the public eye. In nominal terms, it returned 7.9 per cent in 2007 and has averaged 6.5 percent a year over the past decade. After accounting for inflation, costs and management fees, it has averaged an annual return of 4.6 per cent since its inception, outpacing the 4.1 per cent gain in a government-set benchmark.
Fund managers are seeking to increase the amount they can hold in equities from the current 40 per cent, and may start investing in property and leveraged buyout funds. A new office is opening in Shanghai, joining those in New York and London, and staffing is being increased to 200 from about 150.