In May 2012, the world’s biggest sovereign wealth fund joined US investors BlackRock and Waddell & Reed to buy a $1.6 billion (R17bn) stake in motor racing’s Formula One. The people who had worked on the deal for months were looking forward to celebrating their hard work.
Then they got an e-mail from their boss. Under no circumstances were they to be seen drinking champagne in the VIP tribune at the Monaco Grand Prix.
“We have high expectations in terms of ethical standards, also for ourselves,” said Yngve Slyngstad, the head of the Government Pension Fund Global, which invests $163 000 of oil and gas wealth for each man, woman and child in Norway.
“We cannot behave in a way that makes people doubt that we have their best interests at heart,” he said. “Our duty as an asset manager is to manage the people’s money, public money. This means there is a particular responsibility on us.”
Norway has a population slightly larger than the state of South Carolina but its government-run wealth fund has $833bn in assets, making it one of the world’s largest investors. It owns 1.25 percent of all the shares worldwide, 2.5 percent in Europe, and it has a unique ethical mandate. That sees it avoid companies such as Walmart, which Norway deemed to have breached “human rights and labour rights”.
But it is underperforming. Since it started as a sovereign fund in 1998, it has returned an average of just 3.41 percent a year, short of its target of 4 percent.
Now Slyngstad, head since 2008, faces a political test. A new government, in power since October, is reviewing strategy at the fund. To boost returns, the right-wing coalition is reviewing its investment policy and organisation and may let it invest in riskier assets. Some commentators worry that could hurt the fund’s ethical focus.
Already, politicians and the media in Norway pay close attention to the companies the fund invests in. It strives to meet the ethical expectations of 5 million Norwegians and heeds warnings from global campaigners such as human rights activists, environmentalists, and trade unions. Even Bill Gates voiced an opinion.
Slyngstad is employed by the central bank and his ultimate boss is the parliament. Until last October, Norway, the world’s number seven oil exporter, was ruled by a coalition led by the centre-left Labour party. Now the centre-right Conservatives are in an alliance with the more radical Progress Party, which made reshaping the fund part of its election promise. Its leader, Siv Jensen, said her party “has been fighting Socialism for 40 years”, and she is now finance minister.
Change – albeit gradual and consensual – is likely. Some in the Conservatives, whose leader Erna Solberg is Prime Minister, have suggested dividing Norway’s wealth into two competing funds. Others, in Progress, want to break off three smaller funds to focus on renewable energy and foreign aid, and to let Norwegian finance groups manage some of the cash.
“The fund’s investments have to be defendable politically,” said Oeystein Doerum, the chief economist at Norway’s largest bank, DNB.
Norway’s finance ministry determines the broad assets Slyngstad can invest in. Originally that was only government bonds. Corporate bonds, stocks and then real estate were added later. An independent council of ethics keeps a blacklist of companies whose shares the fund may not hold. Otherwise, Slyngstad is in charge.
“Slyngstad is clear and loyal, which is very important for the finance ministry,” said Henrik Syse, the fund’s head of corporate governance between 2005 and 2007 and a fund adviser until 2009.
Both government parties think the fund should be allowed to pep up its performance by investing in foreign infrastructure. Private equity investments are another possibility. Such assets would be less easy to trade, but could yield more.
Fund commentators such as Sony Kapoor, a senior visiting fellow at the London School of Economics who wrote a critical study of the fund last August, argue that in a changing world, the conservative approach has become a liability – the fund places too much emphasis on investing in developed economies.
Its mandate says investments must be balanced geographically: At the end of 2012 about 48 percent was in Europe, 15.5 percent in Asia Pacific and 35.6 percent in the Americas and Africa. The remainder was in bonds issued by international organisations, which the fund no longer buys.
“The fund’s approach… has now become a bet on the future of OECD (Organisation for Economic Co-operation and Development) economies being bright,” Kapoor wrote. “This locks in low returns and exposes the fund to concentrated risks of ageing populations and over-indebtedness faced by many mature economies. The fund has inadvertently taken on a lot of risk, for very little return.”
Kapoor said the mandate should be changed so the fund could take advantage of long-term growth in emerging markets.
“Not only will this be good for Norway, it will also enable faster growth in poorer economies and create millions of much-needed jobs,” he said.
It is a line echoed by Gates, the Microsoft founder turned philanthropist. He has argued that Norway, as one of the richest countries in the world, can afford to help out people in poor countries in Asia and Africa.
The fund is already increasing its exposure to emerging markets. The share of European investments should be reduced to 41 percent gradually, the finance ministry said in 2012.
“We invest according to our mandate as defined by the finance ministry,” spokesman Thomas Sevang said.
When Slyngstad took over, the fund was already boosting its exposure to risk. It increased the share of assets it could invest in stocks to 60 percent from 40 percent. Critics at the time argued that this was too big a gamble, but it paid off.
The fund returned 12.7 percent on its investments in the second quarter of 2009, its best ever performance, as world stocks bounced back. Since then, performance has been less volatile and in the fund’s latest quarter, it returned 5 percent. During Slyngstad’s tenure so far, its annual return has averaged 3.14 percent, just below the overall average.
Adding more risk to the fund’s portfolio would not be simple.
It talks with the 7 500 firms it invests in on topics from the equal treatment of shareholders to children’s rights. Slyngstad is responsible for a focus on children’s rights. How, Slyngstad asked, could a fund that invests for future generations make money out of exploited children abroad?
Between 2008 and 2011, the oil fund published reports on how particular investments fared in terms of child labour. In 2011, it named companies it felt were best at managing and reporting the risks of child labour – these included Walt Disney, Ericsson and Hennes & Mauritz (H&M).
In addition to ethical policies drawn up by the fund, the finance ministry forbids investment in firms that produce nuclear weapons, anti-personnel landmines, cluster bombs or tobacco. Nor can the fund support companies involved in environmental damage, gross corruption or “serious and systematic human rights violation”, such as forced labour, the worst forms of child labour, murder or torture.
An independent council of ethics makes recommendations to the ministry on what companies should be excluded. The five-strong council follows media reports about alleged abuses, commissions research and deals with reports made by NGOs. About 60 firms are out of bounds for Slyngstad and his team.
Among proposed changes to the fund is a plan to scrap the council of ethics’ independence. A government commission has found it may move more quickly if it was brought under the central bank’s control. That possibility has alarmed activists, who argue that the fund needs a strong and independent body to screen firms and make recommendations.
Critics also said it was already short of resources. It used to have a section working on corporate governance, for instance, with about 10 people dedicated to the issue in 2007, Syse said. That was scrapped when the head of the section left in 2012, and its staff integrated into equity investment.
The aim was to enhance their direct contribution and efficiency, Sevang said.
Whatever shape or resources the fund has in future, balancing risks and rewards will always be a tall order. – Reuters