The Economist 04Apr2020

The EconomistApril 4th 2020 Finance & economics 65

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Buttonwood Advantage Norway

T

here is apoint in a conversation

with Yngve Slyngstad when he in-

vokes Bjorn Borg, the Nordic tennis star

of the 1970s. The Borg approach—make

sure you don’t lose; above all, be solid—is

one Mr Slyngstad has instilled in Norges

Bank Investment Management (nbim),

the organisation he has run since 2008

from within Norway’s central bank. Its

target, to beat a benchmark by 0.25 per-

centage points a year, is modest. But

meeting it has led to immodest wealth.

Mr Slyngstad is to step down later this

year when Nicolai Tangen, a London-

based hedge-fund manager, takes his

place in Oslo. The departing boss re-

signed in October, 50 years to the day

after Norway first struck oil. The same

day Norway’s oil fund passed Nkr10trn

($900bn) in value. It is the world’s largest

single owner of equities. On average it

owns 1.5% of every listed firm globally.

This seemed improbable when Mr

Slyngstad joined in 1998. The price of oil

was falling towards $10 a barrel. The idea

of an oil-reserve fund seemed risible. Yet

Mr Slyngstad left a well-paid job in the

private sector. What attracted him was

autonomy. He and his senior colleagues

used it to build a fund manager based on

sound principles. Discipline, solidity,

minimising errors—these Borg-like

tenets are difficult to follow when man-

aging a portfolio. But they are key to

investing success.

Norway’s oil fund was set up in 1996.

Its founding stemmed from an aware-

ness that oil-producing countries run

into trouble. One trap is the “resource

curse”, the corruption that mineral

wealth often fosters. Another is “Dutch

disease”—currency appreciation that

then retards the progress of other export

industries. The fund is primarily a means

to smooth the effect of volatile oil rev-

enues on the government’s budget. All oil

revenue is paid into it. It then makes a

steady contribution to the budget. A de-

cade-long oil boom created a windfall. The

fund came to be seen in a new light, as an

endowment for future generations. At its

peak last year, it was worth around three

times Norway’s annual gdp.

Its wealth is also the fruit of judicious

investment. Mr Slyngstad was brought in

to build the fund’s equities arm; until then

all the money had been in bonds. In princi-

ple, a long-horizon investor should tilt

towards riskier shares. But even the best

principles can be hard to follow. This

became clear soon after Mr Slyngstad was

made boss. The fund had raised the equity

share of its portfolio from 40% towards

60% during 2008. The timing looked bad.

The stockmarket crashed in the autumn. A

rally in the fund’s bond holdings limited

the damage. Still, the fund lost 23%.

There was then a tough decision to

make. The principles of the fund called for

rebalancing: selling bonds that had gone

up in value to buy shares that had become

cheaper, thus reaching the 60% equity

weight. It takes stomach to buy assets

that others are fleeing from. Some funds

suspended their rebalancing rules. Was

there hesitation? “Yes, of course,” says Mr

Slyngstad. It was a big political risk. If the

stockmarket did not revive, there would

be a reckoning. Even so, the finance

ministry gave its blessing. “We ended up

buying $175bn of equities, 0.5% of the

market, during a huge crisis.” This set the

fund up nicely for the ten-year bull mar-

ket that followed. Rebalancing is now

hard-wired into its processes. There are

times, such as now, when shares have

again fallen a long way and it is easy to

lose your nerve. It is usually the worst

time to do so.

The fund’s long-term focus means it

can be bold during crises. But there are

also constraints that do not apply to

other investors. The need for transpa-

rency rules out dabbling in private-

equity funds. nbimhas been a pioneer in

socially responsible investment. This

might look like Nordic do-goodery and a

sop to posturing politicians. But the

approach is hard-headed. A lot of deci-

sions to exclude stocks are taken with an

eye to long-term returns. Coal shares, for

instance, are out because the business

does not appear to have a lasting future.

Companies in emerging markets that do

not pass muster on corporate governance

are avoided. In general this has been a

way to improve returns.

The tennis analogy is: stay on your

baseline; eliminate basic errors; be solid

first—and only then, be smart. You will

win in the long term. A lot of fund man-

agers see a risk to their careers in looking

too far into the future. They may lose

clients in the meantime. Things are

different at Norway’s oil fund. “The

career risk”, says Mr Slyngstad, “is not to

implement the strategy.”

The departing boss of a big-hitting sovereign fund on building an asset manager

erty services and consulting firm.

All told, households and firms owe

around $125bn. How much of that might go

unpaid? It seems likely that the 3.3m work-

ers who signed up for unemployment

benefits in the week to March 21st will have

also sought relief from their landlords or

their banks. Economists at the University

of Chicago reckon that two-thirds of Amer-

icans cannot work entirely from home.

Many may lose some pay as a result.

Some businesses might be able to keep

earning even while their offices are shut.

Retailers less so. A slew have already said

that they won’t cough up. Nike, a sports-

wear-maker, says it will service half its rent

this month. The Cheesecake Factory, a res-

taurant chain, plans to pay nothing at all.

The damage done to the financial sys-

tem depends in large part on how flexible

landlords and creditors can be. Govern-

ment intervention should allow many

households to postpone payments. The

vast majority of residential mortgages are

held, or backed, by government-sponsored

entities (gses), like Fannie Mae and Fred-

die Mac (see chart on previous page). The

government has ordered these to grant for-

bearance to homeowners, and has imposed

a moratorium on foreclosures. The Federal

Reserve will buy unlimited quantities of

mortgage-backed securities (mbs) issued

by gses. Small residential landlords should

also be well-supported by such measures.

These own the majority of rental properties

and owe $4.3trn in mortgages.

The commercial sector, though, has less

flexibility. Most mortgages for retail and

office spaces, which are worth a combined

$3trn, are taken out by professional land-

lords. They are usually owed to one of four

groups: banks, life insurers, the holders of