Report Suggests Norway's SWF Needs to Harness Its Size

According to a report by an independent council, Norway's 3 trillion kroner ($494 billion) Government Pension Fund-Global should take better advantage of its size, lack of liabilities, and long investment horizon.

(November 30, 2010) — A new report by an independent council of Norway’s Government Pension Fund-Global, the world’s second-largest sovereign wealth fund, shows that the fund should take better advantage of its size.

The report, compiled by the Strategy Council which is charged by the Norwegian Ministry of Finance to periodically review the fund’s investment strategy, asserted that the $494 billion fund should use its massive size and long investment horizon to boost returns. “The distinguishing characteristics of the Fund include its large size, its long time horizon, the fact that it does not have specific liabilities (outside the return assumption specified by the spending rule), and its ownership and governance structure. Our proposed future changes focus on taking advantage of the long horizon,” the report stated.

Strategies suggested: diversifying its equity portfolio to harness its value and liquidity risk premiums, selling insurance, and boosting its contrarian investing based on valuation ratios. “Acting as an opportunistic liquidity provider or a contrarian investor not only serves a social purpose of stabilizing distressed markets, but should also enhance the investor’s long-run returns,” according to the report. “Good governance requires that the ownership of fund risk is clearly specified – both the benchmark risk and the active risk.”

The Strategy Council, led by Chairman Elroy Dimson, emeritus professor of finance at London Business School, aims to improve the strategy and heighten the level of transparency within the fund, encouraging dialogue throughout the investment process.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742