Norway SWF Urged to Upgrade Oversight Before Diversifying

The Labor Party in Norway has called for the $880 billion Government Pension Fund—Global to up its governance game before moving into private equity and infrastructure.

Norway’s biggest political party has challenged the country’s $880 billion sovereign wealth fund to improve its governance before hiking exposure to riskier assets.

The Labor Party’s concerns centre on the fund’s purchase of a stake in Formula One prior to its planned IPO, initially planned for 2012. However, the listing was subsequently cancelled, leaving the Norway Government Pension Fund—Global with a private equity holding that its investment rules do not permit it to own.

“The Formula One case was quite an eye-opening experience for politicians who are dealing with issues regarding this fund. It illustrates that we need a strong system of monitoring.”—Marianne Marthinsen, Norwegian Labor Party finance spokesperson.

Bernie Ecclestone, CEO of Formula One, this month paid $100 million to settle a German corruption case, which has served to fuel political debate about the investment.

For more stories like this, sign up for the CIO Alert newsletter. 

“The Formula One case was quite an eye-opening experience for politicians who are dealing with issues regarding this fund,” Marianne Marthinsen, the Labor Party’s finance spokeswoman, told Bloomberg. “It illustrates that we need a strong system of monitoring.”

The fund is currently lobbying for greater investment powers, including permission to allocate to infrastructure and private equity. But Marthinsen said this permission should be withheld until the fund’s oversight and governance processes can be reviewed.

Norway’s Labor Party holds 30% of the seats in the country’s parliament but is not part of the ruling coalition. The government—made up of the Conservative and Progress parties—has supported the sovereign wealth fund’s current structure, with Finance Minister Siv Jensen last week stating that there was no need for change. However, the coalition had voiced a proposal to break up the fund when it came to power last year.

Marthinsen also argued that the central bank’s role in overseeing the fund should be addressed as it was distracting from monetary policy. She suggested splitting or strengthening the committee. The governor and deputy governor of Norway’s central bank both sit on the seven-member committee which runs the fund.

She said: “The discussion of whether or not to have one common board is clearly one of the discussions we need to have in the years to come. We also have people who are quite concerned that the monetary policy is suffering because the management of the fund is taking more and more of the board’s time.”

A 24-hour media cycle may be overstating the level of geopolitical risk in the world and factors behind the headline news should be considered when constructing portfolios, Legal & General Investment Management (LGIM) has cautioned.

Emiel van den Heiligenberg, head of asset allocation at LGIM, said uncertainty is often confused with risk and investors should look beyond temporary conflicts that make news headlines.

“We think investors have learned from 9/11 not to over exaggerate the long-term global impact,” Emiel van den Heiligenberg, LGIM. “Almost by definition most geopolitical incidents are quite unpredictable, the impact on markets is always immediate (so it is difficult to get ahead of the curve), and, while sometimes the instantaneous impact is really significant, it is rarely lasting,” said van den Heiligenberg. “The usual initial market reaction is an increase in equity risk premium, a rise in volatility, a fall in government bond yields (even though some shocks are actually inflationary), and a fairly mixed reaction in oil and gold, depending on the nature and the location of the conflict.”

Local markets take much more of an impact than those further away, with the US and UK markets the most shielded even from their own domestic events, such as 9/11 or the London bombings, van den Heiligenberg said.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“We think investors have learned from 9/11 not to over exaggerate the long-term global impact, especially when policymakers pledge their support and reduce interest rates, for example,” he added. “This explains why some of the recent geopolitical conflicts, like Syria and Gaza, though disastrous from a human perspective, haven’t had too much lasting impact on markets, so far.”

Investors should instead consider the longer-term shifts around the world that could have a heavier bearing on the positioning of their portfolios.

“I can’t help thinking that we will see a pendulum shift from a period where we enjoyed the benefits of a ‘peace dividend’ of the 1990s thanks to the fall of the Berlin Wall, globalisation, and growing economic prosperity towards a period of elevated geopolitical risks,” van den Heiligenberg said.

These risks included the rising income inequality around the world. This has been evidenced by data from the OECD showing the average income of the richest 10% of people has risen to nine times the income of the poorest 10%, from seven times 25 years ago.

“This results in an increasing risk that an extremist party gets voted into government in a major developed economy,” van den Heiligenberg said.

The role of the US, which had typically acted as a global police force, has shifted to take a more “isolationist” view, he said. This meant the world’s largest economy—and superpower—was more concerned with its own issues than preserving world order.

The digital revolution, which has helped world progress in many ways, has begun to spawn its own troubles, van den Heiligenberg said, citing Russian hackers stealing more than one billion internet passwords in a recent heist reported by the New York Times.

However, adjusting investment portfolios to take risks—either temporary ruptures or more long-term features—is not easy, van den Heiligenberg admitted.

“Even though you can make some generalisations on the market reaction when geopolitical events occur, there is no such thing as a standard market reaction to a geopolitical crisis,” he said. “To manage your portfolio it is crucial to analyse each event on its own specific merits and to make a judgement call on the long-lasting consequences for the economic and earnings fundamentals.”

Related content: The Politics of Pensions