Managing the world’s largest sovereign wealth fund will become complicated

NOTICOLA TANGEN brings an unusual set of skills to the task of leading the world’s largest sovereign wealth fund. In addition to a career in finance, the director of Norges Bank Investment Management (NBIM), who oversees Norway’s $ 1.4 billion oil fund, has degrees in art history, economics and social psychology. Mr. Tangen’s public profile and his reflections on leadership, decision-making and interdisciplinary learning were admired by many Norwegians during his first year on the job. But the task of managing Norway’s gargantuan piggy bank will likely only become more difficult in the years to come.

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A busy nomination process first propelled Mr. Tangen into the limelight. The controversy has centered on his potential conflicts of interest with AKO Capital, the $ 20 billion hedge fund he founded. After months of heated public debate, he transferred his stake in the company to charity before taking the helm of NBIM.

Having paid a high price for his work, Mr. Tangen is determined to leave his mark on the fund. At the start of his term, he announced three priorities: communication, talent development and performance. Mr. Tangen communicates with the public and the media much more often than his predecessors, in an effort to make the fund’s operations more transparent. In January NBIM began publishing how he would vote at annual meetings of shareholders five days before deliberations. Meanwhile, the publicity generated by his appointment has led to an increase in applications for the fund, said Tangen. He also hired a sports psychologist to strengthen the emotional resilience of his employees in the face of the vagaries of the markets.

However, it is the performance of the fund that matters most. NBIM receives an investment mandate and an equity-bond division by the Ministry of Finance. Over time, the allocation to equities has increased to around 70% today (see chart). In turn, revenue streams from the petroleum fund finance about a quarter of Norway’s annual budget. The performance has remained so far: the fund posted an annual return of 9.4% in the first half of this year (although in the third quarter it only gained 0.1% compared to the previous three months) . Since its inception in 1996, the investment pot has generated, on average, 0.25% excess returns per year over a benchmark index of global stocks and bonds.

Mr. Tangen has leeway within the limits of his mandate. The size of the fund means that even small adjustments can make a big difference to returns, in terms of cash flow. For a long time, the investment pot was managed as an index fund owning an average of 1.4% of every listed company in the world. But in April, Tangen announced that he was placing more emphasis on a more active strategy called “negative selection,” which involves selling stakes in companies that appear particularly risky. He wants to strengthen the fund’s forensic accounting team to eradicate fraud. (Even before Mr. Tangen took over, the fund had cleverly reduced its exposure to Wirecard, a German payments company that imploded after a hole in its finances was discovered.)

Mr. Tangen, who says he plans his life in discreet pieces like a communist apparatchik, expects to stay in his job for five years. The remainder of his tenure is likely to contain several challenges. By far the biggest worry is inflation, which could affect the value of the fixed income and equity portions of the fund’s portfolio. A period of low real returns is looming, especially as politicians have little appetite for the fund to invest in opaque private assets, which may fare better in times of inflation.

Lower yields as well as a more active approach could complicate the communications challenge. Espen Henriksen of the Norwegian Business School in Oslo is concerned that frequent contact with the public may distract Tangen from “deep, principled thinking about asset management.” NBIM has been such a political and financial success, Henriksen believes, having overseen a de facto index fund for so long. A more active strategy could make the sovereign wealth fund more open to criticism.

Another concern is political interference, says Karin Thorburn of the Norwegian School of Economics. Politicians used to just leave the fund to make money. But the center-left Norwegian government, which came to power in September, seems to take a different point of view. In his first interview since the elections, Jonas Gahr Store, Prime Minister, said the fund was “political” because it belonged to the Norwegian people and its mandate was set by parliament.

The ruling party has made it clear its intention to encourage NBIM do more to reduce the greenhouse gas emissions of its portfolio companies. Fortunately, this dovetails with Mr. Tangen’s desire to be a responsible investor and, he says, should not compromise the fund’s returns. The danger, however, is that the political influence doesn’t stop there, and it starts to hurt performance. These lessons in psychological resilience may well prove useful in the years to come. â– 

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This article appeared in the Finance and Economics section of the print edition under the headline “Point of weak returns? “

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