After 10 years spent establishing and consolidating a giant, the €231bn Norwegian Government Pension Fund – Global is starting to spread its wings. A dramatic increase in the fund’s equity allocation is planned, while a Shanghai office is set to follow the fund’s existing London and New York offices later this year.

Responsibility and sensibility have been the key features of the Norwegian Government Pension Fund – Global’s investment philosophy. It is now 10 years since the fund started investing profits from North Sea Oil and, having built up an organisational structure to manage the huge fund, changes are on the agenda.

In April, the government made proposals to increase the fund’s equity allocation from 40 per cent to 60 per cent. Parliament is expected to formally confirm these proposals on 8 June. Plans are also in place to move into alternatives, with property the first area to conquer. Steering these changes is Martin Skancke, head of the asset management department at the Norwegian Ministry of Finance, which runs the fund.

“The next big thing will be investments in property and infrastructure,” says Mr Skancke. While most other institutional investors already have exposure to property, the fund has remained cautious about alternative investments.

“While increasing the equity allocation is about getting higher returns, alternatives are about spreading the risk,” says Mr Skancke. “The advice from the Central Bank is to set a strategic target of 10 per cent allocated to property, but it will take time to get there.”

The preparations are already well under way. PricewaterhouseCoopers is preparing a report on taxation legislation for property investments and NBIM just hired Paul Golding to head a project to plan property investments. But no final decision has yet been taken on which markets the fund will invest in and whether to opt for direct or indirect investments.

“We will probably be looking for different solutions for different markets while spreading our investments geographically. It is very likely that we will get a diversified property portfolio,” says Mr Skancke.

Property over private equity

Private equity is another asset class that the fund might approach in the future.

“We think of private equity as a growing part of the market with good benefits, but have some doubts about transparency and fees. Property is our priority,” Mr Skancke adds.

Any changes to the asset allocation will require approval from the Norwegian parliament, however. On 8 June, it will take a decision on the fund’s foray into equities and it is almost certain that the amendments will be passed. “Increasing our equity allocation will be the single most important step towards improving the fund’s returns over time,” says Mr Skancke.

The fund has had a 40-60 equity-bond split since 1998 and the allocation changes were suggested by Norges Bank last year. “Increased equity exposure will give long term benefits to a fund with our time horizon and size. We believe a greater equity allocation is reasonable and are pleased that the Ministry of Finance has taken Norges Bank’s advice on board,” says Knut Kjaer, chief executive officer at Norges Bank Investment Management (NBIM) and the man responsible for building up the asset manager. NBIM has managed the operational side of the fund for the past 10 years and serves as an adviser to the Ministry.

“When the fund was set up in 1998, the current time frame for investments didn’t exist. The fund has since grown more than anyone could have believed back then and the investment horizon has now expanded,” says Mr Skancke.

In 2001, when new financial policy guidelines were introduced, it was decided that the fund’s mandate would be to maximise annual investment return. This gives the fund an indefinite time horizon.

“The increase in equity allocation will not happen overnight. There are many things to consider, such as not affecting the market, keeping transaction costs low and spreading the risk by buying shares at different points in time. The timing will also depend on the speed of new inflow of money,” says Mr Skancke.

The Ministry of Finance has responsibility for the management of the fund and determines the investment strategy. It also sets out ethical and corporate governance principles and oversees the operational management of the fund, a task which it delegates to Norges Bank. The Government Pension Fund consists of two different funds, each with a specific investment region. The much larger Global fund is only allowed to invest abroad, while the smaller Norwegian fund mainly invests in Norway, but also to some extent in the Nordic region.

Building asset management

Mr Skancke returned to the Ministry of Finance in September 2006 from the prime minister’s office with the task of building up the organisation in the then newly established asset management department.

“My priorities have been to build up the department, find out who to hire and set up a strategy for what to do in coming years. Increasing the equity share has been one of the top priorities,” says Mr Skancke.

The department started out with only five members of staff, a number that has now doubled. Mr Skancke is also in the process of recruiting two new employees to his team.

Previously, the economic policy department was in charge of the Government Pension Fund, but the more complex and demanding task of managing a fund that had grown to €231bn in 10 years required a new structure. It now has more capacity to deal with the fund and give it the attention a fund of its size needs. This spring was also the first time that the annual report of the Government Pension Fund was presented separately to the parliament, another indicator of its increased importance.

On the operational side, NBIM’s Mr Kjaer has over the past 10 years built up a working structure for the investments of the fund.

“As a transition manager, we take money from the oil profits and invest them into the market. Our job is to invest the money as efficiently as possible while following the strategy chosen by the owner, the Ministry of Finance, and large amounts are invested every day,” says Mr Kjaer. “We are still in a building phase, however, and the learning curve has been sharp.”

Closer to the markets

A corporate governance department has also been set up, headed by soon-to-depart philosopher Henrik Syse, to pursue ownership rights to ensure that long-term financial returns do not come into conflict with ethical considerations.

Since the start, NBIM has grown to employ more than 140 people and now has offices in both London and New York.

“Our aim is to make better investments by being closer to the markets and get a better understanding and better information.

We will open another office in Shanghai this year. Our international offices also help us attract the best staff. We have a large number of non-Norwegian employees,” says Mr Kjaer.

He adds: “This isn’t an ordinary job. It brings with it a special kind of responsibility, but it is nothing that I can’t live with.”

Location: Oslo, Norway

Assets: (€213bn)

Returns (%)

2006                                  7.9
2007:   
First quarter                    1.5
Equities                            2.6
Bonds                               0.7

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