How The Strategy Of The Norwegian Fund Management Evolved Over Time
Oil-rich countries can transform the lives of millions of citizens if they can manage their oil resources in an sustainable manner. Unfortunately, most of the countries which have huge oil reserves are governed by people who have no vision about the future. So the resources are recklessly spent and invested in unproductive activities with a short-term perspective. In contrast, Norway has a fund which manages the money that is accumulated from oil reserves for the present and future generations. Since 1996, when the first capital was transferred to the fund managed by the Norges Bank, it has become the best ‘Sovereign Fund’ in the world. It generated an annual return of 5.9 per cent between 1 January 1998 and the end of the first quarter of 2018, beating the average inflation of 2.10 per cent. This article is an attempt to find a clue or cue for better investment strategies for other countries. Our guest writer, Rajesh. T. V. who is a Business and Economic Journalist – shares his thoughts on the subject.
The scientific management of enormous investments can be traced to the history of Norway where the rugged terrain and difficult climatic environment forced every inhabitant to plan ahead and work hard for earning a living. They have to purchase and store food items for the future, sometimes the climatic conditions force them to sit indoors. This planning for the future is embedded in the psyche of every Norwegian. Hostile climatic conditions have forced citizens to work harder to compensate for the leisure days followed by the extreme climate.
This sought of planning pervades the activities of daily life, thereby enhancing their intuition, creativity, logical and mathematical aptitude to help them plan for the future with clinical precision.
These strengths that they have acquired by virtue of living in the country led to the designing of the Fund’s strategy. It is exactly designed to help present and future generations meet their needs. As present needs are already taken care of, thanks to the huge natural resources when compared to a diminutive population, so that all the monetary resources can be invested for future needs. ‘The long-term perspective’ is drilled into the investment strategy.
So as to sustain the long-term wealth formation, the fund is invested across the world in three different formats- Equities, Fixed income and Real Estate. Norwegians know from their experience that investing in their country may not be a viable option in the long run. So they have a broad-based investment strategy of investing outside Norway, particularly in Europe and North America and other countries. This strategy ensures that the short-term volatility is reduced and investments are sustainable over a longer period of time.
When the investments in equities and real estate are volatile but inevitable for growth, fixed income investments which are highly secure reduces the short-term volatility. This balancing aspect ensures that ups and downs in the market do not affect the fund.
Having identified the huge oil reserves before 1960’s, International and popular oil companies across the world were invited to explore oil. For the next four years, no oil was found, leaving a single company, Philips petroleum to explore oil. And finally, they struck oil in the 38th well. This consistency and patience in achieving the impossible is an integral aspect of Norwegian investments.
The revelation that this oil reserves will exhaust in 50 years led to the scientific inquiry for finding an alternative. As the natural resources will deplete faster, there should be a system to sustain the ‘Nordic Welfare Model’ which includes Universal Health Care and social security system.
This Norwegian society model stresses on the principle that all people are equal and deserve equal rights and opportunities. So the fund is managed for supporting and taking care of the needs of the present and future generation.
This egalitarian ideals is the bedrock of the Norwegian economy, ensures that every finance minister oversees the fund to safeguard the principles so that all the citizens of the country get benefitted.
Keeping High Ethical Standards
‘Responsible investing’ is another investment principle which means that investments will not be done in those companies which are selling nuclear weapons, tobacco products, engaging in human rights violation, etc. This also shields the fund against investing in poorly governed or destructive companies.
However, because the fund is transparent to the public regarding its investment strategies, it has generated a serious debate on the limit of disclosing information. This has lead to the underperformance of the fund especially during the sub-prime mortgage crisis that happened in 2008. It triggered public criticism but the long-term time horizon ensures that the fund is growing safely, as minor deviations will not affect the growth of the fund.
There are certain principles that the world’s biggest sovereign fund embraces throughout its investment horizon. It doesn’t mean that other countries have to simply ape the same investment strategy but they can take a clue or cue, which will at least encourage them to save and invest for the present and future generations.
Rajesh.T.V. is a business and economic journalist. He can be reached at firstname.lastname@example.org
© Rajesh.T.V. / #Norway Today