Government report advises Norway fund to increase risk

A $400bn-plus Norwegian sovereign wealth fund has been urged to increase its exposure to riskier assets including infrastructure, but should be ‘circumspect’ about private equity.

Norway’s $400 billion-plus sovereign wealth fund, The Government Pension Fund Global (GPFG), has been advised by a government commissioned report to invest more of its resources into higher risk sectors.

The Investment Strategy and the Government Pension Fund Global report was published at the end of last month. In it, its writers, including chairman Elroy Dimson, professor of finance at London School of Economics, urged the fund to increase its exposure to riskier assets. This included infrastructure, a sector to which it currently has no capital allocated.

The report said: “The long horizon makes the GPFG more tolerant of short-term losses than most investors. The simplest way to exploit the above-average risk tolerance would be further raising the equity allocation.”

The fund has been net returning 2.28 percent a year from its portfolio – split 59.6 percent equities and 40.4 percent bonds – significantly below its 4 percent target return.

The report said the fund was already “exposed to concentrated equity market risk” so the next step would be to “harvest risk premia” form multiple sources. These, the report said, should include those related to value and liquidity, which would aid it to increase its risk-adjusted returns.

One area the report recommends investment is in insurance selling strategies but it added “some exposure to infrastructure could be beneficial”. The report compared the exposure of other sovereign wealth funds, including the Canada Pension Plan Investment Board, which has 4.7 percent of its capital allocated to infrastructure; the Government of Singapore and the Alaska Permanent Fund Corporation, both of which have 3 percent allocated to the sector.

But on private equity the report intimated that the high costs charged by many managers would be prohibitive for the fund to allocate meaningful capital to the sector. It said: “We are circumspect about private equity, however, since we are concerned about the difficulty of hiring private equity managers who will, in aggregate, deliver acceptable after-costs performance.”

This flies somewhat in the face of messages emanating from its 2011 budget report in October. In that report, while the fund was slated to be seeking infrastructure exposure, it was also looking to introduce private equity investments into its portfolio. It has already set a 5 percent allocation to real estate and had made inroads into that programme, last month investing £448 million (€529 million; $702 million) into a 25 percent stake on London’s Regent Street, from the Crown Estate.