NBIM Goes Long!

The NBIM is one of the biggest – if not the biggest – sovereign funds in the world. (The question mark about its actual rank here is due to the opacity of ADIA, not NBIM.) Its size alone makes it worth paying attention to. But the NBIM is also quite creative and thoughtful, which I appreciate in my capacity as a nerd. For example, NBIM manages ~95 percent of its assets in house (that’s, like, $550 billion dollars entrusted to internal teams) all the while restricting those in-house managers to investments in foreign markets. (Local knowledge?) It also offers very useful insights into a variety governance matters, which is one of my main areas of research. Anyway, let’s just say the NBIM is a fund that’s worth paying attention to. And, significantly, it has just released its 2011 annual report, which is well worth reading in its entirety. Which I did. Which means you don’t have to. (Unless you take pleasure, as I do, in activities that drive others insane.) Anyway, I’ve grabbed a few excerpts that I thought were particularly interesting. Here’s NBIM on... Its renewed focus on long-term investing: “NBIM in 2011 developed its investment management to take greater advantage of the fund’s long-term perspective and size. We set up a team to allocate funds to different markets and assets based on their long-term prospects. We also increased the number of companies where we have large, long-term investments. We made the fund’s first real estate investments and developed our management in this area. In addition, we introduced a new operational bond benchmark portfolio and reduced the number of fixed-income holdings...” Its belief in pricing tomorrow’s biggest risks today: “A good long-term return depends on sustainable economic, environmental and social developments. We consider social, environmental and governance risks when making large investments and as part of our active ownership. We established a database in 2011 with information on such risks at about 4,000 of the largest companies the fund held shares in at the end of the year...”Its belief in fundamental research and development: “We also established a unit focusing on the theoretical foundation of different parts of the fund’s management. As part of this, we introduced the Norwegian Finance Initiative (NFI) to promote financial research and education in areas relevant to the fund’s long-term management. These may include asset pricing and portfolio theory, corporate finance, active ownership, corporate governance and market microstructure...”It’s unfortunate these three paragraphs are buried within NBIM’s annual report, because they speak volumes about the future of institutional investment. Here’s my main take aways: 1) Go long. 2) Going long means pricing long-term risks. 3) Going long means adopting an innovative investment ontology – thinking differently about deploying capital. 4) Going long means recognizing that being a long-term investor is different from being a short-term investor. 5) Going long means doing fundamental research to generate actionable insights for a long-term investor. 6) Going long means looking beyond conventional finance theory and its short term incentives. 7) Going long means breaking out from the status quo bias.

That’s all very positive stuff. And given I once scolded the NBIM quite publicly for too much short-termism, I feel obliged to give credit where credit is due. Nice job, NBIM. Keep it up.