As an after-effect of the financial crisis, an uncomplicated approach to investment is a good thing. Yvnge Slyngstad of NBIM tells Funds Europe how the Norwegian sovereign wealth fund is changing the way it invests.
The Norwegian sovereign wealth fund is a trendsetter in the investment world and it says simplicity is the way forward.
The Norwegian Government Pension Fund – Global, which is one of the largest asset pools in existence, is looking to streamline its investments, standardise its IT systems across the entire portfolio and leave strict benchmarks behind.
In its most recent annual report, the fund, which has NOK3.1trn (€395bn) in assets under management, outlined its plans for simplifying the way certain things are done.
Yvnge Slyngstad, chief executive officer of Norges Bank Investment Management (NBIM), the firm that manages the majority of the fund, explains: “Considering the size of the fund, we have to express our investment views in simple instruments because we need liquidity to be able to employ large amounts of money. Also, it’s about conceptually moving back to fundamental analysis of the underlyings or intrinsic value of investments.”
Its annual report states that between 2011 and 2013, the fund aims to ease the complexity of its management, partly by reducing the number of types of bonds.
Leverage and derivatives will also be off the table. Slyngstad says: “With regard to our fixed-income portfolio, we will have less trading strategies that involve leverage or the use of derivatives.”
As at December 2010, the fund had NOK1,186bn invested in fixed income.
In terms of investment, Slyngstad also plans to focus more on absolute return.
Again for the period 2011 to 2013, NBIM says that its strategic plan will place a greater emphasis on absolute return. “The long-term investment outlook and size give more opportunity to invest in assets, such as real estate, that may be difﬁcult to sell at short notice. By better exploiting such opportunities, NBIM can contribute more to the fund’s absolute return over time.”
Asked what his definition of absolute return is, Slyngstad deferred his answer, explaining instead the reasoning behind the move away from benchmarks. “Our role in the Norwegian public sphere has been to give advice to the ministry of finance on benchmark composition, which is stage one,” he says. “Then in stage two, we index the indices that they give back to us and in stage three we build a long/short overlay to increase our excess return relative to pure index management.
“Now we’re basically saying that the process shall not, or cannot, be composed of or divided into those three elements.”
The current process that sees NBIM and the finance ministry going back and forth is somewhat inefficient, especially when you are trying to be nimble and capture investment opportunities observed in the market.
Slyngstad says: “The biggest issue we had is that it doesn’t help you to be close to the index if the index is wrong. So, therefore, our need to change the index composition quite frequently is not currently captured in the way that we have to send letters to the ministry of finance and they reply and so on, so we’d rather not use those structures.”
In practical investment terms, he says the investment of the fund will be less benchmark focused and perform less tailoring of benchmarks specific to all the different mandates it runs internally.
The move to an absolute return-type strategy may also lead to more investment in illiquid assets. Furthermore, he says: “We will take larger positions in single stocks. We will remove quite a lot of tighter benchmark structures for the internal portfolio managers and have more cash funding for different strategies rather than detailed benchmarks for each of those strategies.”
But other investment managers should not hope for a sizable mandate to come their way. Slyngstad says the plan is to manage the additional absolute return exposure internally.
As one would imagine, the move away from benchmarks is being made with the ultimate aim of improving performance.
Although, judging by the fund’s most recent statistics, it is already on the right track.
In 2010, the fund posted its ﬁfth-highest result ever in 2010, with a return of 9.6% overall. This result was also 1.1% higher than the fund’s benchmark index. On its global equity portfolio the fund returned 13.3% while the performance for fixed income was 4.1%.
But the Norwegian SWF is not only looking to simplify its investments. The IT systems it currently uses will also be streamlined and standardised.
NBIM says it plans to “simplify its processes and standardise its systems”.
Asked for more details, Slyngstad says: “We had put in place a number of systems tailored for all kinds of different processes. The systems’ different investment teams are quite varied and now we’re introducing a more unified investment infrastructure platform across all investment teams.
“Not only has there been a difference on an asset class level between fixed income and equity but also between the different strategies; indexing versus the long/short managers were all using different IT solutions. Now we’re standardising those structures.”
The decision of what system the fund as a whole will be using has not been made and the tender is still on the market.
©2011 funds europe