If you're wondering about the headline. It's simple. I tricked you. I have a thought that I've been developing for a year now, and to get you to read it, I went ultra tabloid. It refers to a 30% selloff in global stocks in a week, something akin to what happened in 2008. This would cause The Norwegian Sovereign Wealth Fund to lose about 158 billion dollars on stocks.
Now let's get to the actual idea. Bear with me. This is one of those kind of posts with the point in the last few paragraphs.
At the exact moment of writing this, The Norwegian Sovereign Wealth Fund (NBIM) is valued at 5 722 040 285 379 NOK or $859 810 711 552. That's just shy of 1 trillion dollars.
The fund has a complex structure of investing directly in companies, leaving the fund as - on average - a 2% owner of any major corporation out there. That's the rule of thumb.
The investments are, as of today, split into:
- 61.4% equities
- 37.3% bonds
- The rest in real estate
I know several of the people in the fund, and the depth of talent there crushes anything you find anywhere in Norwegian finance, which is notoriously underdeveloped. Considering how the rest of the financial landscape is in this small nation, with a animosity towards modernity, it's kind of remarkable that such a fund is able to effectively be run as a hedge fund. Which makes me both proud and hopeful.
With $859 billion in AUM, it's effectively the largest de facto hedge fund in the world, easily beating Bridgewater, which manages "only" $87.1 billion. It's not a hedge fund of course, but it's a pension fund in name only, in my view. Which is excellent.
The size of the fund is a huge problem. The fund received its first money in 1996; $6.9 billion. This was at a time with the price of crude oil hovering right above $10 (I know right, it sounds unbelievable now). In 18 years the fund has grown huge, both due to returns and a lot of money injections from the government. It is now more than 100 times larger than in 1996, yet the strategy is pretty much the same.
It's still got a 60/40 style of investing, having added a tiny fraction of real estate in the past years.
But the uncomfortable truth is, today QE is more than likely ending and the thrill ride that has been fueled by global central banks appears to be over. Yet the strategy is still to keep surfing that wave with a big exposure to global equities.
But with almost 1 trillion dollars, what the hell else can you do?
Well, like the FT has partially put forward, I think they should reevaluate how they approach the situation.
Here's what I would like to see changed:
- Reduce the equity allocation to 40%
- Increase the real estate portion to 10%
- Keep bonds at 30%
- 10% to infrastructure in Norway. In a high speed rail and road system
- 10% to renewable investments (anything from Tesla to solar)
If you're reading this as a non-Norwegian, you might be surprised to learn that the infrastructure in this country is fairly poor. Norway has historically been a poor country, with people living isolated lives in very remote areas. It's only in the last 100 or so years the country is fairly unified. This has resulted in a road and rail system of substandard quality and a heavy reliance on airplanes to get around. Looking to Sweden, it's easy to see how much better a road system could be, if you have a big plan (sidenote: it doesn't hurt to cooperate with the nazi's and not get burned to the ground - but I digress).
It would be possible to turn the road and rail system to world class with the kind of assets Norway holds, creating much needed diversification of business away from oil, structured similarly to NBIM with limited political interference.
At the end of the day, what the hell is the point of creating the world's largest fund, which is 60% exposed to global equities? What is the outcome? With 1/100th of that amount of assets, the strategy makes sense, but now it's just based on inertia and a complete lack of vision.
Lastly, using oil money to invest in the future of energy has a very nice ring to it, doesn't it? If the last ten years has been about oil, QE and China-fueled growth, the next ten could likely be about renewable energy. Just because it hasn't quite worked yet, doesn't mean it's been wrong. Just early.