Report Suggests Norway's SWF Needs to Harness Its Size

According to a report by an independent council, Norway's 3 trillion kroner ($494 billion) Government Pension Fund-Global should take better advantage of its size, lack of liabilities, and long investment horizon.

(November 30, 2010) — A new report by an independent council of Norway’s Government Pension Fund-Global, the world’s second-largest sovereign wealth fund, shows that the fund should take better advantage of its size.

The report, compiled by the Strategy Council which is charged by the Norwegian Ministry of Finance to periodically review the fund’s investment strategy, asserted that the $494 billion fund should use its massive size and long investment horizon to boost returns. “The distinguishing characteristics of the Fund include its large size, its long time horizon, the fact that it does not have specific liabilities (outside the return assumption specified by the spending rule), and its ownership and governance structure. Our proposed future changes focus on taking advantage of the long horizon,” the report stated.

Strategies suggested: diversifying its equity portfolio to harness its value and liquidity risk premiums, selling insurance, and boosting its contrarian investing based on valuation ratios. “Acting as an opportunistic liquidity provider or a contrarian investor not only serves a social purpose of stabilizing distressed markets, but should also enhance the investor’s long-run returns,” according to the report. “Good governance requires that the ownership of fund risk is clearly specified – both the benchmark risk and the active risk.”

The Strategy Council, led by Chairman Elroy Dimson, emeritus professor of finance at London Business School, aims to improve the strategy and heighten the level of transparency within the fund, encouraging dialogue throughout the investment process.

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Shareholder Group Says Pay Practices at Banks Fueled Risk-Taking

The Council of Institutional Investors, which represents about 130 pension funds, has shown that pay practices at major Wall Street banks likely helped drive excessive risk-taking by executives and contributed to financial collapse in 2008.

(November 30, 2010) — A report by the Council of Institutional Investors, which represents about 130 pension funds, asserts that pay practices at major Wall Street firms have fueled excessive risk-taking by executives.

The report, by Paul Hodgson, senior research associate at The Corporate Library, covered Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. It found that financial firms linked too many of their pay practices to short-term results. Additionally, the survey asserted that many of these firms inflated salaries to offset the impact of regulatory controls put in place after the 2008 market meltdown.

“The global financial crisis that erupted in 2008 cast a harsh light on executive compensation at many Wall Street banks,” the report, titled “Wall Street Pay: Size, Structure and Significance for Shareowners,” stated. “Legions of executives pocketed large compensation packages or departed with generous severance payments even as their banks descended into bankruptcy or were bailed out by the federal government.” The report concluded that the size and structure of these pay packages offered perverse incentives that helped drive excessively risky decisions that pushed financial markets to the brink of disaster.

As institutional investors have become increasingly vocal about pay practices following the 2008 financial crisis, the report may help inform shareowners’ decisions about how to cast advisory votes on executive compensation at US public companies. While the increased pressure has succeeded in pushing Wall Street firms to revise their compensation structures, the report concluded that the changes in the US might not be enough to help prevent future crises. “While many banks have strengthened their pay practices, there’s still a long way to go,” Amy Borrus, deputy director at the Council of Institutional Investors, told the Wall Street Journal. “The report suggests they need to do more to make sure that executive compensation rewards performance over the long term.”

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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