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Newsmakers

Norway SWF Enjoys Gains, Spurred by European Bond Exodus

The Government Pension Fund Global returned 4.7% in the third quarter of 2012.

(November 5, 2012) — Norway’s sovereign-wealth fund, the world’s largest, has become even larger in the third quarter.

The fund’s growth was spurred largely by a global equity markets rally as it also lowered its holdings of European bonds. “The result was largely driven by a rally in global stock markets,” said Yngve Slyngstad, chief executive officer of Norges Bank Investment Management (NBIM), which manages the fund. “Stocks gained the most in Europe, where the fund has about half of its shareholdings.”

According to a statement by the fund, equity investments–including allocations to German chemical producer BASF SE and US technology companies Apple Inc. and Google Inc.–returned 6.5% and fixed-income investments returned 2.2%. Investments in real estate returned 2.7%.

NBIM said on Friday that the government pension fund rose to a value of NOK3.723 trillion Norwegian ($653 billion), after realizing a return of NOK167 billion, or 4.7%, in the three months through September.

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Additionally, the fund reduced its holdings of French and Spanish government debt in the quarter while increasing its investments in US and Japanese government bonds. It increased its holdings of government bonds issued in the currencies of emerging economies such as South Korea, Mexico, and Russia. “The changes reflect a strategy to gradually reduce the fund’s share of European bonds while increasing bond investments in other regions,” NBIM’s statement said.

The fund held 60.3% in equities, 39.4% in fixed-income, and 0.3% in real estate at the end of the quarter. Geographically, as outlined by the fund’s quarterly report, the fund’s exposure to Europe was 47.8%, while investments in the Americas, Africa, and Middle East totalled 37.8% as of September 30. Asia and Oceania comprised 14.4% of the total portfolio. The target allocation is to reduce exposure to Europe to 41%, and exposure to the Americas, Africa, and Middle East to 40%. Roughly 19% of the portfolio would be invested in Asia and Oceania.

Talking to aiCIO in 2010, Slyngstad said the usual queries and conundrums over managing assets did not apply to Norway, due to the enormity of the fund’s portfolio. When asked for his views on the debate that was raging about how best to manage equities, he said: “We’re not for or against active or passive management for smaller firms or investors. What we are saying is that, for an investor of our size, we need to be a leader and take an active role. We don’t really think that there is an alternative to active management for our fund. In one sense, we are quite simply too large to contemplate indexing.”

Related article: The Norway v. Yale Models

Home > News > Asset Allocation > UBS Advisor to Foundations: Risk Up or Wither
Asset Allocation

UBS Advisor to Foundations: Risk Up or Wither

Private foundation CIOs can’t meet long-term goals by playing it safe, according to a top portfolio advisor for UBS.

(November 5, 2012) – In an environment with negative real interest rates, how can foundation investors meet their long-term goals?

Mostly, they can’t-or so says Michael Crook, an executive director and head of the Portfolio Advisory Group at UBS.

Crook, who is also an adjunct economics professor at Marymount Manhattan College, built a sophisticated returns model to test the relative success of different foundation portfolios over the next 20 years, and published the results for three quite divergent portfolios in a paper titled “Investment Policy for Private Foundations: Seeking Compliance and Survival in the New Normal.”

The verdict: Crook’s riskiest portfolio had the likeliest chance of succeeding in the long-term, but the probably was still only 48%. In this scenario, the mock portfolio is 37.7% global fixed income, 10.9% emerging market debt, and just 3.8% US equities. Some 26.6% of these mock assets go to developed markets outside of America. Of the riskiest assets in the model fund, Crook allocates 15.8% to emerging market equities and 5.1%, to commodities.

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Twenty years from now, Crook’s model indicates that the most conservative portfolio would have only a 12% chance of meeting its baseline goals, and a moderate portfolio would likely fare slightly better, at a one-in-three chance of 20-year success.

The author defines success using three common foundation investment policy objectives:

1. Distribute 5% of the net fair value of their assets per year. 

2. Maintain at least a constant level of real (inflation-adjusted) charitable giving per year.

3. Do so in perpetuity.

So back, then, to the original question: What is a foundation CIO to do?

“It is clear that more-risky allocations have a much better chance of achieving the goals described than more-conservative portfolios. In fact, even a moderate portfolio is unlikely to be sufficient for meeting the general investment objectives of a foundation over the next 10 to 20 years with a high degree of certainty,” says Crook in his paper.

Either risk up, or drop expectations, Crook continues: “To the extent that a foundation’s trustees are uncomfortable targeting a portfolio risk level greater than what is generally considered to be moderate (portfolio #2), the objective of maintaining the inflation adjusted value of the corpus must be relaxed or removed. If trustees are focused on maintaining purchasing power at a 5% distribution level, additional contributions are likely to be necessary to make up the difference.”

Read Michael Crook’s entire paper here.  

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