Fun with Fund Models

When it comes to models of institutional investment, there are a few ‘brand names’ that quickly come to mind. Yale, Canada, Dutch...and now Norway. Get ready for the ‘Anti-Yale Model’...


When it comes to models of institutional investment, there are a few ‘brand names’ that quickly come to mind. For example, there’s the Yale Model (or Endowment Model), which refers to an investment strategy that seeks to marry broad diversification with an equity orientation. You may also be familiar with the Canadian Model, which refers to a fund that prioritizes in-house asset management. Then there’s the Dutch / Danish Model, which is all about liability driven investment. After that, the ‘Models’ get a bit murkier if still identifiable: the Australian Model, which would be a sort of outsourced, manager-driven investment approach; the New Zealand Model, which would be based on investment innovation; the Swedish Model, which would be based on cost efficiency; and the American Model, which would (I have to assume) be based on a politicized and under-resourced investment operation. (Zing!)

Anyway, to all those models you can now add another: The Norway Model. No doubt we’ve been talking about the Norway Model for some time (like here and here), but now it’s gone legit, as David Chambers, Elroy Dimson and Antti Ilmanen have published an interesting new paper entitled “The Norway Model”. Here’s a blurb:

“The Norway model is virtually the opposite of the Swensen model. Norway has relied almost exclusively on publicly traded securities, it is constrained to a low tracking error, and it has a rigorous asset allocation that allows little deviation from the policy portfolio. More generally, it depends on beta returns, not alpha returns. This contrasts with the Swensen model, which aims for investment managers to bridge their deficit in systematic risk exposure by exploiting market mispricing.”

So the Norway Model is sort of the Anti-Yale Model? Interesting. Here’s more:

“The Norway model works for that country for a variety of social, governmental and institutional reasons. This model – or its underlying philosophy – might be a more suitable template than Swensen’s Yale model for many other investors. Why could this be? There are three major reasons. First, while there is little long-term evidence of persistent alpha returns, there is ample historical support for beta returns from multiple factors. This can make the Norway Model attractive to many investors since they can also evaluate the potential future performance statistically, rather than relying on an ill-defined and unmeasured “illiquid asset premium.” Second, the costs and managerial complexity of the Norway Model are significantly lower. Third, there is much less opportunity for agency problems when portfolio holdings are marked to market, centrally custodied, and observable. The Norway Model has been the subject of much recent discussion. It is likely to be an important contributor to investment thinking over the years to come.”

Indeed. You can read more about the Anti-Yale Model here.