How Norway’s SWF Plans to Benchmark Real Assets

The $846 billion fund has formally requested to double the target size of its real estate portfolio.

The world’s biggest sovereign wealth fund has published proposals to overhaul its benchmarking process in preparation for entering infrastructure markets for the first time.

Norges Bank Investment Management (NBIM), which runs the $846 billion Norwegian Government Pension Fund—Global, has also formally recommended that the country’s finance ministry permit doubling the SWF’s real estate allocation and buy infrastructure assets.

“The index represents a strategy that the manager is expected to depart from if this helps improve the trade-off between expected risk and return.”“The benchmark model is not well-suited to the fund’s investments in unlisted assets,” NBIM wrote in its submission to the ministry. “NBIM’s proposed changes aim to address the challenges this presents, while also retaining the key features of the current division of responsibility between the ministry and NBIM.”

Currently, the fund’s equity and bond allocations are benchmarked to major indexes, but its direct investments in property do not have a formal performance comparator.

Under the new proposals, NBIM would remove its fixed 5% allocation to unlisted assets. Instead, it would adopt a “holistic” approach, measuring risk and return for the whole portfolio relative to a benchmark of equity and bond indexes.

Citing similar approaches by top-tier pension and sovereign funds—including the Canada Pension Plan Investment Board, Singapore’s GIC, and the New Zealand Superannuation fund—NBIM said this would allow the performance of unlisted assets to be measured on excess return above a simple equity/bond split.

“The benchmark is no longer a strategy that the manager is expected to follow closely, but—through the size of the equity allocation—an indirect expression of the owner’s tolerance of variations in returns,” NBIM explained in its submission. “In this model, the index represents a strategy that the manager is expected to depart from if this helps improve the trade-off between expected risk and return in the portfolio.”

NBIM added that “only small adjustments” to its systems would be necessary to adopt the new approach.

In separate submissions to the Norwegian ministry of finance, NBIM recommended doubling its target allocation to real estate to 10%, with the ability to vary this by up to 5 percentage points above or below the target. It plans to reduce fixed-income investments to facilitate the move, should it be approved. Within this 10% target, NBIM proposed including infrastructure investments.

The formal request follows research published by NBIM last month, which made the investment case for a real estate allocation of up to 15% of its portfolio.

Related: Norway SWF Opens Japan Office in Property Push & Bespoke Deals on the Rise in Real Estate