Norway Adopts Fresh Responsible Investment Framework

Norway’s $856 billion sovereign wealth fund (SWF) is to get a new responsible investment mandate from January 1.

The country’s Ministry of Finance has appointed a new Council on Ethics to provide feedback to the Government Pension Fund Global’s advisory committee. It has also given the fund new guidelines about excluding companies from its portfolio.

Responsibility for “observation and exclusion of companies” has passed from the Ministry of Finance to Norges Bank, which runs the fund’s investment portfolio.

“The changes in the governing documents are a result of a long-term effort to strengthen the work on responsible investment management in the fund,” said Siv Jensen, Norway’s minister of finance. “Emphasis is put on facilitating better interaction between active ownership and the exclusion mechanism.”

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The changes follow research by Norges Bank Investment Management, at the ministry’s request, which showed that active engagement with companies was a preferable approach to divestment.

The ministry did not make any changes to the criteria currently in place that dictate the companies that must be excluded from the SWF’s portfolio.

The five new members of the Council on Ethics include chairman Johan Andresen, owner of financial and industrial conglomerate Ferd, Guro Slettemark, general secretary of Transparency International Norway, and humanitarian lawyer Cecilie Hellestveit. Hans Christian Bugge, professor of environmental law at the University of Oslo, and Arthur Sletteberg, CEO at Norwegian Microfinance Initiative, have also been appointed to the council.

Investing across a combination of risk factors—or ‘styles’—rather than individual ones may deliver uncorrelated premia, deliver higher returns, and reduce risk, according to AQR.

In a paper, the hedge fund group argued that investors tend to focus on value, momentum, carry, and defensive factors separately, missing out on potential diversification benefits. The firm added investors are likely to overpay in costs and fees by chasing these alternative sources of return.

“Just as multi-strategy alternatives seek to benefit from diversification across strategies to provide investors more consistent outperformance, so can a combination of styles,” AQR said.

The firm applied the four styles across six different asset groups—ranging from stocks to currencies to commodities—during a set period from January 1990 to June 2013, and found positive risk-adjusted returns and low correlations to the equity market.

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Sharpe ratios ranged from 0.9 to 1.3 while correlation to equities varied from -0.15 to 0.22. These factors also diversified one another, with cross-correlations from -0.6 to 0.22.

While certain pairings of factors and asset class may outperform others, AQR said a comprehensive combination of styles would be most efficient in building a “well-balanced, diversified portfolio.” It would also avoid “strategically over- or under-weighting certain styles,” the firm added.

According to the firm’s data, a multi-style composite portfolio was able to provide high risk-adjusted returns—a Sharpe ratio of 1.02—with just 0.01 of correlation to equities.

The correlation between the factor portfolio and a 60/40 portfolio from 1990 to 2013 was just 0.02 while its correlation to the Credit Suisse hedge fund index was higher at 0.16.

Adding composite factor exposure to the traditional portfolio also reduced volatility, from 9.5% in the 60/40 portfolio to 7.3% with 30% of style premia.

AQR launched its style premia alternative fund last year.

AQR Style Premia2

AQR Style Premia1