The Economist - 04.12.2021

80 Finance & economics TheEconomistDecember4th 2021

NorgesBankInvestmentManagement

Point of low returns?

N

icolaitangenbringsanunusualset

of  skills  to  the  task  of  leading  the

world’s  largest  sovereign­wealth  fund.  In

addition to a career in finance, the head of

Norges  Bank  Investment  Management

(nbim), which oversees Norway’s oil fund

of $1.4trn, holds degrees in art history, eco­

nomics and social psychology. Mr Tangen’s

public  profile  and  his  musings  on  leader­

ship,  decision­making  and  cross­disci­

plinary learning have been admired by ma­

ny Norwegians in his first year on the job.

But  the  task  of  running  Norway’s  gargan­

tuan  piggy­bank  is  likely  to  become  only

more difficult in coming years.

A  fraught  appointment  process  first

thrust  Mr  Tangen  into  the  limelight.  The

controversy  centred  on  his  potential  con­

flicts  of  interest  with  ako Capital,  the

$20bn  hedge  fund  he  founded.  After

months  of  heated  public  debate  he  trans­

ferred his stake in the firm to charity before

taking the helm at nbim.

Having paid a hefty price for his job, Mr

Tangen is determined to make his mark on

the fund. Early in his tenure he announced

three  priorities:  communication,  talent

development and returns. Mr Tangen com­

municates  far  more  often  with  the  public

and the media than his predecessors, in an

effort  to  make  the  workings  of  the  fund

more  transparent.  In  January  nbimbegan

publishing  how  it  would  vote  at  annual

shareholder  meetings  five  days  ahead  of

the proceedings. Meanwhile, the publicity

generated by his appointment has resulted

in  a  surge  in  job  applications  to  the  fund,

says Mr Tangen. He has also hired a sports

psychologist  in  order  to  bolster  his  em­

ployees’  emotional  resilience  to  the  ups

and downs of markets. 

It is the performance of the fund, how­

ever,  that  matters  most.  nbimis  given  an

investment  mandate  and  an  equities­

bonds split by the ministry of finance. Over

time the allocation towards stocks has ris­

en to around 70% today (see chart). In re­

turn, income streams from the oil fund fi­

nance about a quarter of Norway’s annual

budget. Performance has held up so far: the

fund  posted  an  annual  return  of  9.4%  in

the  first  half  of  this  year  (though  in  the

third quarter it gained only 0.1% compared

with  the  previous  three  months).  Since  it

was established in 1996 the investment pot

has delivered, on average, 0.25% of excess

returns  a  year  over  a  benchmark  index  of

global equities and bonds. 

MrTangenhaswriggleroomwithinthe

confinesofhismandate.Thesheersizeof

thefundmeansthatevensmalltweakscan

makea bigdifferencetoreturns,incash

terms.Fora longtimetheinvestmentpot

wasrunmuchlikeanindexfundowning,

onaverage,1.4%ofeverylistedcompanyin

the world. But in April Mr Tangen an­

nounceda greateremphasisona moreac­

tive strategy called “negative selection”,

which involvessellingstakesincompa­

niesthatlookespeciallyrisky. Hewantsto

strengthenthefund’sforensic­accounting

teamto rootout fraud.(EvenbeforeMr

Tangentookover,thefundhadcannilyre­

duceditsexposuretoWirecard,a German

paymentsfirmthatimplodedaftera hole

initsfinanceswasexposed.)

MrTangen,whosaysheplanshislifein

discretechunkslikea Communistappara­

tchik,expectstostayinhis jobforfive

years.Therestofhistenureislikelytohold

severalchallenges.Thebiggestworrybyfar

isinflation,whichcouldhitthevalueof

both the fixed­income and the equities

portionsofthefund’sportfolio.A periodof

lowrealreturnslooms,especiallyaspoliti­

cianshavelittleappetiteforthefundtoin­

vestinopaqueprivateassets,whichmay

farebetterininflationarytimes.

Lowerreturnsaswellasa moreactive

approachcouldcomplicatethecommuni­

cationschallenge.EspenHenriksenofthe

NorwegianBusinessSchoolinOslowor­

ries that frequent hobnobbing withthe

public distracts Mr Tangen from“deep,

principledthinkingaboutassetmanage­

ment”.nbimwassuchapoliticalandfi­

nancial success, Mr Henriksen reckons,

becauseitoversawa defacto indexfund

forsolong.Amoreactivestrategycould

leave the sovereign­wealth fund more

opentocriticism.

Another concern ispoliticalinterfer­

ence,saysKarinThorburnoftheNorwe­

gianSchoolofEconomics.Politicianshave

previouslybeencontenttoleavethefund

to getonwithmakingmoney. ButNor­

way’scentre­leftgovernment,whichcame

topowerinSeptember,seemstotakea dif­

ferentview.Inhisfirstinterviewsincethe

electionJonasGahrStore,theprimeminis­

ter,saidthatthefundwas“political”,asit

belongedtotheNorwegianpeopleandits

mandatewassetbyparliament.

Therulingpartyhasmadeclearitsin­

tentiontoencouragenbimtodomoreto

reduce its portfolio companies’ green­

house­gasemissions.Thishappilydove­

tailswithMrTangen’sdesiretobeare­

sponsibleinvestorand,hesays,neednot

jeopardisethefund’sreturns.Thedanger,

however,isthatpoliticalinfluencedoes

notstopthere,andthatitbeginstohurt

performance.Thoselessonsinpsycholog­

icalresiliencecouldwellprovehandyin

theyearstocome.n

OSLO

Managing Norway’s vast oil fund is abouttogetcomplicated

Piggy-bank performance

Norway, Government Pension Fund Global

Source:NorgesBankInvestmentManagement *Measuredusinganinternationalcurrencybasket †AtJune 30th

1,500

1,000

500

0

21†1816141210082006

Totalassets,$bn

Renewable-energyinfrastructure

Fixedincome Equity Realestate

50

5

0

-5

-50

21†1816141210082006

Annual return* by asset class, %

Unlistedrenewableinfrastructure

Fixed income Equity Unlisted real estate

To t a l

From hedge fund to oil fund