Marc Rubenstein writes an insightful blog on financial services businesses. However, this one features not exactly a business. It is about a sovereign wealth fund, the largest in the world – Norges Bank Investment Management. When the Norwegians discovered oil in the North Sea, they decided to buffer the government expenditure from the inevitable volatility of oil prices by putting much of the oil proceeds into a fund, as a department of the Norwegian central bank – Norges Bank. Whilst the first oil came out in the 70s, it wasn’t until the late 90s the fund got capitalised.

“The fund is now worth 17,395 billion kroner, equivalent to $1.6 trillion, or 3x Norway’s GDP. Money has been added along the way, but less has been taken out, and investment performance has contributed to the fund’s growth. The government maintains a strict spending rule that allows it to withdraw only the equivalent of the real return on the fund – estimated to be around 3% per year – but 3% of a big number is a big number and such withdrawals are sufficient to fund 20% of the state budget. Meanwhile, the fund compounds. Net flows account for less than half the current value of the fund; most is due to investment performance”

And it has worked really well. In a world where active management is hard, a fund as large as $1.6trn has done better than the index over a quarter of a century:

“Over the years, the firm has delivered enhanced returns by trading around its index. Since the beginning of 1998, its relative return has annualized at 0.28%. An independent performance evaluation published in 2022 concluded that active management of the equity portfolio in particular creates value and that in the period January 1998 through to September 2021, overall active management added 228 billion kroner of value before costs and 170 billion kroner after costs…

…Given its size, though, capturing value from active management is hard. The firm owns stock in 8,859 companies around the world, holding an average 1.5% stake in each of them (2.7% in European companies).”

Its large size is not the only constraint. The government ownership adds to the challenges:

“The fund’s use of external managers, staff remuneration and asset allocation are all tightly regulated. Remuneration limits are set by the central bank’s executive board at rates that are “competitive but generally not market-leading.”

Rather than being a disadvantage in the market for talent, though, the firm uses its government mandate as an advantage. “We manage the fund on behalf of the Norwegian people,” it says – a purpose that is deemed very attractive by employees. Even non-Norwegian employees value the mission:

“I worked other places before, making a few really, really wealthy persons even more stinking rich,” said one. “Our mission statement ‘for future generations’ – I like that. To me, it gives my work meaning.””

Whilst the purpose driven motivation for success gives hope in an industry predominantly driven by financial incentives, there is perhaps a bigger reason for the fund’s success – complete alignment of interest with its principals – the people of Norway:

“One advantage of the firm’s structure is that it has a single client, so it doesn’t need to employ salespeople, nor manage conflicts between fund performance and firm growth. A 2017 proposal to establish a separate entity to manage the fund was rejected by the Ministry of Finance and the Parliament, both of which concluded that such a structure could present principal-agent problems if the entity’s goals and priorities are no longer fully aligned with those of the asset owner.

…As an asset owner, the firm takes its responsibilities seriously. It votes at all its companies’ annual general meetings – around 120,000 proposals a year – announcing its voting intentions five days ahead of time for transparency purposes (and making it arguably the third largest proxy advisory firm, after ISS and Glass Lewis, given its influence). In 2011, when the EU proposed a deal to refinance Greek debt, NBIM voted against it – without consulting the Ministry of Finance. In a more recent example, it is leading a class action suit against Silicon Valley Bank”

However, the fund predominantly invests in public markets and is now seeking permission from its principals to explore private or unlisted securities:

“In a letter to the Ministry last November, CEO Tangen and the governor of Norges Bank noted that unlisted equity investments represent a natural evolution of the fund’s investment strategy as the listed market becomes narrower:

“A small proportion of listed companies are accounting for an ever larger share of the listed equity market. The number of listed companies worldwide has levelled off. Since 2010, the listed equity market has not grown beyond what can be explained by movements in share prices. There are fewer IPOs in developed markets, and the companies coming to market are larger than before. This suggests that the GPFG is missing out on part of companies’ growth by not investing until after they have been floated and eventually enter the fund’s equity benchmark. These trends are not new but have become more pronounced over time.”

At NBIM’s recent investment conference, Marc Rowan, CEO of Apollo Global Management, added his thoughts: “Why does an institution with a 20 or 40 year time horizon concern itself with liquidity?” he asked.”

For now, the ministry has declined permission to invest in private markets.

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