Transparency and trust are driving forces behind the management of Norway’s revenues from oil and gas production. As sovereign wealth funds (investment funds owned by governments) receive increased scrutiny by regulators, the Norwegian Pension Fund – Global may become a model for other sovereign wealth funds.
1/24/2008 :: Norway, one of the world’s largest petroleum exporters, has invested its oil wealth in a fund with a current market value of more than $350 billion. This makes it Europe’s largest, lagging behind only that of the United Arab Emirates among SWFs.
Morgan Stanley projects that sovereign wealth funds could grow from their current total of $2.5 trillion to $12 trillion within a decade. A concern in the United States and Western Europe is that secretive management under government ownership may raise national security concerns, distort markets by pursuing strategic objectives (not financial) and threathen financial stability.
“There is a serious likelihood of Western governments and funds clashing over what they can buy and where,” chief economist at Standard Chartered Bank in London, Gerard Lyons, recently told the International Herald Tribune.
Will the emergence of sovereign wealth funds really increase the volatility of markets? The opposite may be the case. Because of a long-term investment horizon for SWFs, the funds will not be forced by capital requirements or investor withdrawals to liquidate positions rapidly. “They won’t get ‘cold feet’ in down-times when other investors scramble to sell, but rather stay in it for the long haul and contribute to stabilizing the market,” said Lars Fjell Hansson, Counselor for Economic and Financial Affairs at the Royal Norwegian Embassy in Washington, D.C.
“There is a strong case for sovereign wealth funds to adopt the best practice of open funds like Norway,” Gerard Lyons in Standard Chartered Bank emphasized.
What makes the Norwegian fund different from several other sovereign wealth funds 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 one percent of available shares. The fund does not seek to control companies through buy-outs. In fact, by its own rules the fund restricts its ownership in any company it invests in to five percent of shares. The investment objectives are purely financial in nature, safeguarding assets for the long term.
The Norwegian fund is an instrument for ensuring that a reasonable portion of the country’s petroleum wealth benefits future generations. This is regarded as an ethical obligation. Only the returns from the fund will be spent in the annual national budgets. The fiscal rule says that four percent of the fund may be spent, which is estimated to be the real return of the fund over time. This strategy of controlled spending will also keep inflation in Norway down.
The second ethical obligation is to respect fundamental human rights. The fund is taking a stand against serious violations of human rights, such as child labor, gross corruption, and severe environmental degradation. The fund divests itself of shares in companies which produces certain weapons, for example, cluster-munitions. Norway has called for a complete ban on such weapons. The ethical guidelines were adopted by the Norwegian Parliament in 2004.
At a hearing in the United States Senate on November 14, 2007, experts testified on the growth of sovereign wealth funds and on maintaining a balance between attracting foreign investments to the United States while managing potential security issues. Edwin Truman, Senior Fellow at the Peterson Institute for International Economics, presented a scoreboard ranking sovereign wealth funds according to benchmarks on structure, governance and transparency & accountability and behavior. The Norwegian Pension Fund - Global scored 23 out of 25 possible points. This placed the fund second among the 32 countries on the index, one point below New Zealand's Superannuation Fund.
“The U.S. government should continue to actively encourage foreign governments with large cross-border investments to develop and follow a set of best practices with respect to managing those investments
in their interests, in our interests, and in the interests of the stability and openness of the international financial system. Our scoreboard provides a starting point for the development of such a set of best practices for sovereign wealth funds,” Truman said.
Placing third was Timor-Leste Petroleum Fund, followed by Canada’s fund and the Alaska Permanent Fund. “Timor placing this high seems like an anomaly, given that most developing countries placed in the lower part of the index,” Embassy Counselor Hansson said. “But it is probably because as part of its development assistance to Timor, Norway assisted in setting up the structure of the Timor Petroleum Fund. This shows that the guiding principles of the Norwegian model are solid,” he said.
Facts about The Norwegian Pension Fund – Global
- The Norwegian Ministry of Finance has the overall responsibility of the Government Pension Fund. The
operational management of the Government Pension Fund – Global is delegated to Norges Bank (the
Norwegian central bank).
- Key objectives in the management of the Norwegian Pension Fund – Global includes a high degree of transparency
in all aspects of its purpose and operation, the fund’s role as a financial investor with non-strategic
holdings, an explicit aim to maximize financial returns, and clear lines of responsibility between political authorities
and the operational management.
- The fund returned 7.9 percent last year 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 percent since its
inception, outpacing the 4.1 percent gain in a government-set benchmark.
- The Norwegian Pension Fund – Global has a current market value of more than $350 billion (January, 2008), equaling about $75,000 for every Norwegian, investsted in markets all over the world. Close to one third of this is invested in the United States. Over time, the share invested in equities will increase to 60 percent, while 40 percent will be invested in fixed income.
Arild Strømmen / Royal Norwegian Embassy Washington, D.C.