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Force for Change
More risk-taking and shareholder activism for Norway pension CEO Slyngstad.
For the past 12 years, Norways giant pension fund has enjoyed a charmed existence. It has reaped a rapidly growing bounty from the countrys oil export earnings and put that money to work quietly but efficiently, mainly in indexed strategies that prospered from buoyant global equity markets. In short order the Government Pension Fund - Global, as its called, has swelled to a massive 2 trillion kroner ($370 billion), making it the worlds second-largest sovereign wealth fund, behind the Abu Dhabi Investment Authority. And at a time when the growing size and influence of sovereign funds are raising political concerns from Berlin to Washington, Norway has for the most part avoided controversy. Indeed, the funds low-key investing strategy and Scandinavian-style transparency have made it a model that most Western governments would like to see adopted around the world.
Despite all this, Slyngstad, the chief executive and chief investment officer of Norges Bank Investment Management, an arm of the central bank that administers the fund, is looking to overhaul that model. A week after taking the reins of the fund in January, Yngve Slyngstad fired off three letters to Finance Minister Kristin Halvorsen requesting substantially greater freedom to invest the countrys wealth. Seeking to juice up recent subpar returns in his massive portfolio, Slyngstad wanted the power to take much larger stakes in individual companies, to invest in more emerging markets and to make pre-IPO investments in companies preparing for stock market listings. Halvorsen promptly endorsed the ideas, believing that the fund needed to broaden its investing universe to improve performance, and Norways Parliament ratified the decision in June.
Slyngstad is looking to shake things up in other ways. He is setting up a new unit that will invest like a hedge fund, making long and short bets on global sectors and themes such as merger arbitrage and currency movements. And he has slashed the number of top executives in a bid to speed decision making. The initiatives amount to a radical change for a fund that until now has operated with Nordic modesty, almost as if it were embarrassed by the countrys riches and unwilling to make waves. By contrast, Slyngstad is determined to use the financial clout at his disposal, hoping to generate higher returns by ramping up risk and placing bigger bets.
We dont have any liabilities, which means we can take more risk, he told Institutional Investor in a recent interview at the funds modern offices, decorated with Norwegian art, in Londons Old Burlington Street. NBIM has three such branches outside of Norway. We are trying to use our competitive advantage, which is a long-term time horizon.
The changes will make Norway like other sovereign wealth funds in one important respect. Slyngstad wants the fund to be able to act like such sovereign investors as the Abu Dhabi Investment Authority, China Investment Corp. and Singapores Temasek Holdings, which have taken advantage of the credit crisis to buy significant minority stakes in Citigroup, Morgan Stanley and Merrill Lynch & Co., respectively. Its noteworthy that the executive Slyngstad has chosen to head up the funds new capital strategies group, which will be in charge of taking large corporate stakes, is Ola Stavem, who previously headed the financial sector team. It is not out of the question, Slyngstad says, that the Norwegian fund will take advantage of its greater investing freedom to participate in recapitalizations of financial companies.
Such investments are bound to bring a new level of scrutiny to the fund, though. Sovereign wealth funds, with their growing cache of petrodollars and other export earnings, have faced increasing criticism for being opaque, with politicians in Washington and Brussels expressing fears that investments may be driven by political as well as financial motivations. Even Norway, which enjoys a squeaky-clean image because of its openness, has had a taste of political controversy. It drew a sharp rebuke from the Icelandic government in 2006 for shorting bonds of that countrys banks. Slyngstad declined to comment on the matter.
One things for sure: His new strategies risk generating more political storms, with his global macro bets, such as currency plays, potentially the most explosive. Its already controversial when hedge funds short markets, says Brad Setser, economist at the Council on Foreign Relations, a think tank based in New York. But there is a different feeling when one countrys government is betting against another countrys markets. Setser also notes that the more active a sovereign wealth funds mandate and the bigger the fund, the greater the risk it gets into political trouble. NBIM is managing government money, after all, he adds.
Officials at the Norwegian Finance Ministry, however, stress the clear separation between its role and NBIMs. The central banks job is to make money for the fund, says Martin Skancke, head of asset management at the Norwegian Finance Ministry. He adds that countries that receive capital from sovereign wealth funds should allow them to act like other financial investors. Recipient countries gain liquidity and better-functioning capital markets from sovereign wealth funds, he says. It is unfair to say we are not free to sell assets when we think prices will go down. That is what active management is about.
The aggressive new tactics should add considerable muscle to a fund that so far has been the gentle giant of global markets. The Norwegian fund controls over 1 percent of the entire European stock market, according to the funds second-quarter report. It is the single-largest investor in U.K. and French stocks, according to a recent study by French market research firm OpinionWay, and the biggest foreign investor in the U.S. stock market. Although the fund does take some long and short positions in stocks or sectors on which it has firm views, most individual stock holdings hew closely to the average. Until now its individual equity holdings have rarely exceeded $1 billion by value.
The new guidelines approved by Finance Minister Halvorsen and Parliament allow the fund to take stakes of as much as 10 percent in individual companies, up from 5 percent previously. (Slyngstad had requested a ceiling of 15 percent.) The CEO says his aim is purely commercial, not political. The fund wants to maximize its bets, putting more money in companies where it expects to see big returns. And it plans to use its clout to ensure that management maximizes shareholder returns. Our natural hunting ground will be larger companies, says Slyngstad, a youthful 45-year-old with a shaved head and athletic build. Management will naturally listen more to bigger shareholders, he says.
Observers agree. Holding 10 percent of a company gives you considerably greater influence as an active investor, says David Russell, co-head of responsible investment at Universities Superannuation Scheme, the U.K.s second-largest pension plan, with £30 billion ($56 billion) in assets. Not many investors have the resources to take such significant holdings in big companies.
Other corporate governance activists welcome Norways willingness to hold company managements to account. We cant have sovereign wealth funds sitting on their hands, says Anne Simpson, executive director of the International Corporate Governance Network, a London-based lobbying group whose members manage more than $10 trillion in assets. Norway is a model in active investing for others to follow.
The reasons for Slyngstads activism are clear. Last year Norways fund fell short of the targets set by the Finance Ministry for the first time in its decadelong history of equity investing. It returned 4.26 percent in international currency terms (the fund reports in Norwegian kroner and international currency terms, which is based on a basket of currencies), or 0.24 percent below the Finance Ministrys benchmark, which is made up of stocks in the FTSE equity indexes in 27 countries and bonds in the Lehman global aggregate bond indexes, in the currencies of 21 countries. The target is to outperform the benchmark over time. The performance was better than the 3.8 percent return of Europes biggest pension fund, ABP of the Netherlands. California Public Employees Retirement System, the biggest public pension fund in the U.S., posted a return of 10.2 percent, in dollar terms, but the Norwegian krone appreciated by 15.3 percent against the U.S. currency last year.
Performance deteriorated further in the first quarter of this year, when the Government Pension Fund - Global fell 5.6 percent, depressed by a 12.67 percent decline in its equity portfolio. The fund underperformed its benchmark by 0.81 of a percentage point in the same period. It recovered slightly in the second quarter, with the fund falling 1.9 percent but beating its benchmark by 0.24 point.
The significance of Slyngstads more active approach is likely to extend well beyond his funds $370 billion in assets. For its clearly defined commercial strategy and its transparency, which includes quarterly reports of performance and publication of all holdings at the end of the year, the Kingdom of Norway is regarded by many officials and analysts as a model of good behavior. An April report by the Peterson Institute for International Economics, a Washington-based think tank, ranked Norway as the second-best sovereign wealth fund for its structure, governance, accountability and transparency, with a score of 92 percent, just behind the Alaska Permanent Fund Corp., at 94 percent. The Abu Dhabi Investment Authority ranked at the bottom, with a score of just 9 percent.
Norway is helping countries such as Bolivia, Nigeria and Vietnam as they consider how to manage profits from their oil and gas industries, and officials from Russia to Azerbaijan are trekking to Norway to seek advice. The Democratic Republic of Timor-Leste named its oil fund Norway Plus, after designing it three years ago along the lines of the Norwegian fund. The Organization for Economic Cooperation and Development recently recommended that the Canadian province of Alberta and the federal government adopt the Norwegian model of saving most oil revenues in a fund and investing outside the country to prevent the domestic economy from overheating.
Unequivocal lines of authority hold the key to good governance at Norways fund, contends the Finance Ministrys Skancke. There is a clear division of responsibility between the Finance Ministry as the owner of the fund and the central bank as manager, with the one task of maximizing returns, he says.
Skancke is participating in talks, led by the International Monetary Fund, that aim to reach an agreement next month on generally agreed-upon principles and practices for sovereign wealth funds to follow. Maintaining clear lines of responsibility will be an important aspect of the review, he says. Greater transparency by sovereign funds should also help avoid unilateral restrictions on investment practices by countries and regions, he adds. Skancke makes it clear that hes not advocating that the IMF code oblige countries to meet Norways level of transparency. Our system reflects the way our fund is set up and managed, and the political traditions and institutions we have, he says.
Some governments are already erecting barriers. France and Germany proposed the issuance of shares with special rights for European Aeronautic Defence and Space Co. as a safeguard against unwanted investments after Dubai International Capital and a government-controlled Russian bank, VTB, bought stakes of 3.1 percent and 5 percent, respectively, in the company. Norwegian officials believe such attempts to constrain sovereign funds are bound to fail. Some governments dont like us, but they need our money, Halvorsen said at a debate on sovereign wealth funds at the World Economic Forum in Davos in January.
Norways stash is growing fast. The country is the worlds fifth-largest oil exporter, after Saudi Arabia, Russia, the United Arab Emirates and Iran, according to 2007 figures from Norways Ministry of Petroleum and Energy, exporting 2.31 million barrels of oil a day; its 57 fields produce 2.6 million barrels of oil daily. As a result, the oil fund is reaching a size unimaginable in 1996, when the government first transferred oil earnings to what was then known as the Norwegian Government Petroleum Fund. In 1998, when the government added equities to the investment mix for the first time, oil prices averaged about $10 per barrel. Recently, crude prices soared to a record high of nearly $150 a barrel before retreating to about $115 late last month. The fund is pulling in well over $1 billion a week. By 2010 it is expected to reach a massive Nkr4.4 trillion, or $815 billion. Sovereign wealth funds globally now have about $3 trillion in total assets, according to the IMF; that could hit $10 trillion within five years.
In addition to the political attention that will come with taking larger, riskier positions, Slyngstad may soon find himself having to juggle a wider ethical mandate. The Norwegian government can prevent the fund from investing in companies on grounds including weapons work (nuclear weapons are excluded; handguns are not), labor or human rights standards and environmental factors. Oslo currently bars investment in 27 companies, including Indias Madras Aluminum Co. and the U.S.s Boeing Co. and Wal-Mart Stores, a judgment that has drawn a stiff protest from Washington. An ethics review launched by the Finance Ministry in June and set to culminate with a report next spring could broaden the grounds for exclusion to cover things like tobacco and pornography, but give Slyngstad some say over whether the fund should avoid companies outright or work with them to address Norwegian concerns. This is a chance for Norway and NBIM to be a world leader in investing that brings in returns while setting new standards for ethics and sustainability, says Simon Chesterman, a professor at the New York University School of Law and one of the co-authors of a report commissioned by the Finance Ministry, which recommended that Slyngstad work more closely with the government to promote the latters ethical standards. Slyngstad makes it clear that he favors engagement over bans. An exclusion is a defeat of the corporate governance effort, he says. But he declines to discuss the ethical review in detail, saying simply, It is a political issue.
The fund faces political issues on the home front too. In the run-up to Norways September 2009 parliamentary elections, the right-wing opposition Fremskrittspartiet, or Progress Party, has been stepping up calls for the government to draw money from the fund to improve roads, railways and schools. Many voters seem to concur. An August poll by research firm Norstat showed that the Progress Party would win support from about 32 percent of voters, making it the most popular party in the country. The Labor Party, which has led Norways center-left coalition government since October 2005, saw its popularity drop to 26.1 percent.
The issue of how to manage Norways oil wealth will probably be the most important part of next years election, says Progress leader Siv Jensen, tipped by many Oslo analysts to become the next prime minister. We should invest more of the money in our own country to improve our competitiveness from a global perspective.
The son of a civil servant in the planning section of Norways Finance Ministry, Slyngstad grew up in the small, affluent coastal town of Asker, close to Oslo, where his mother worked as a school administrator. His older brother, Stein, opted for a career in the arts, heading up the Stavanger Symphony Orchestra, the Henie Onstad Kunstsenter and the Norwegian Film Fund.
Slyngstad chose a different path. He initially studied law at the University of Oslo and received a masters degree in 1983. Then he switched to finance, attracted by its closeness to the center of gravity of our global capitalist system, he says. In 1984 he went to the University of California, Santa Barbara, to study economic theory and applied econometrics, graduating with an MA in economics before moving back to Europe, where he went to the Norwegian School of Economics and Business Administration and earned an MBA in 1985. In 1986 he completed a degree in political sciences at the University of Paris.
Rather than putting his multiple diplomas to work immediately, Slyngstad spent most of the time from 1987 to 1991 backpacking across Africa, Asia and Latin America rarely staying in the same hotel for more than a night, shunning guidebooks and avoiding well-trodden routes. Craving solitude midway through his travels, he made his way to Tysfjord in Norways rugged far north to spend six months in a remote fishermans cabin with no electricity before heading back out on the road. Travel is a continuous bombardment of impressions, and I wanted to step back and get a different feeling, he says. While in Tysfjord, the countrys second-deepest fjord, Slyngstad passed his time earning a philosophy degree by correspondence from the University of Oslo, his personal contact limited to the shopkeepers he met when he rowed to town for food and supplies.
In 1991, Slyngstad headed for Japan on a scholarship to Kobe University to carry out postgraduate research on optimal hedging ratios for fixed-income portfolios. During that time he sent out his résumé to the Norwegian Finance Ministry, landing a job as a researcher in portfolio strategies for reserves management at the Norges Bank research department in 1993. A year later he was hired as a junior portfolio manager in the fixed-income department of Storebrand Life Insurance, a division of Norways Storebrand Group. There, Slyngstad made his name as a gifted investor and quickly moved up the ranks to become strategist and then chief investment officer for Asian equities in 1996, just before the regions financial crisis hit.
Slyngstad caught the eye of Knut Kjaer, former head of strategy at the insurance group, who had been hired in the spring of 1997 by Norges Bank with orders to start an investment management business from scratch. Kjaer first hired a secretary and then started filling other posts, including head of equities. This was seen as an especially challenging job because the central bank did not have equity investment expertise, Kjaer recalls.
Slyngstad was the perfect candidate, Kjaer says. He was especially impressed when Slyngstad sketched out his vision of the future structure of the equities department over lunch.
Building the equity department from scratch was a unique opportunity, says Slyngstad. You only get that kind of chance once in a lifetime. He started by flying to London and New York to tap international talent. His first hire was Stephen Hirsch, a former U.S. Air Force pilot who had previously worked for Clifton Group, a U.S.-based fund manager. Hirsch was hired as a senior portfolio manager on the equity team. In 2000, Slyngstad opened NBIMs first office, in London, to manage U.K. and European equities.
In 2003 he introduced the hedge fund technique of long-short equity investing, making NBIM a pioneer among public funds in Europe. In the same year he started the switch to electronic trading through brokers telephone lines. The idea, he says, was to keep NBIMs trades confidential as well as to save money and be as fast as possible. Before that NBIM used agency trading for almost all of its trades. Now 92 percent of its equity trading is electronic, says Slyngstad. Every year he came back with new ideas on how to develop the organization, recalls Kjaer.
The results were impressive. The stock portfolios beat their benchmarks every year, except for a slight underperformance of 6 basis points in 2006. The achievements of Slyngstads team helped convince the Norwegian Parliament and public last year that increasing the equity allocation to 60 percent from 40 percent was worthwhile. Although that decision coincided with a big decline in global equity markets, Skancke says the Finance Ministry has no regrets about increasing the weighting in equities, explaining that Norway has a long-term perspective. Slyngstad landed the job of chief executive after Kjaer left NBIM at the end of last year. Kjaer remains an adviser to Norges Bank.
The first thing Slyngstad does when he arrives in the office every morning is check the performance of the portfolio managers in the group. Sticking to the practice established by Kjaer, Slyngstad delegates the active investment strategy to individual managers, who each handle $850 million, on average; there is no common view of stock or bond markets. We have lots of small wheels moving independently, he says. Unlike Kjaer, Slyngstad still manages his own stock portfolio, using a range of strategies, from active overlay to stock and sector-specific investments. His performance is available to his team, but Slyngstad declines to say what his returns have been so far this year. If you dont get humbled by the market, youre probably not taking enough risk, he allows.
During his initial shake-up of NBIM, Slyngstad reinforced his immediate team with proven talent from within the organization. He appointed Hirsch, one of his most trusted lieutenants, as his first deputy CEO. He also promoted Dag Løtveit, former deputy CIO, to head of the newly created risk strategies group. Trond Grande, former chief risk officer, became deputy COO, and Marius Nygaard Haug, former chief of staff and general counsel, was promoted to head of control and compliance. Slyngstad also moved the 12-person risk management team next to NBIMs traders to involve them more closely in the investment process, and asked them to consider a wider range of risk, including liquidity risk.
NBIM manages most of its money internally fully 85 percent at the end of the first quarter. Much of this is effectively indexed by a team of 11 managers, but the fund is increasingly taking an active investing approach. The equity department is divided into global sector strategies based on the analysis of individual companies within certain sectors, and relative-value strategies, which include enhanced-index and quantitative investments. The average active portfolio takes about 20 long and 20 short positions. Internal mandates accounted for just 43 percent of the overall risk associated with active management, although that will increase with the creation of the capital strategies group, which will take big stakes in large-cap companies, and the risk strategies group, which will pursue macro themes.
On the fixed-income side, internal managers handle 94 percent of the funds positions. Slyngstad relies on external managers to run securitized, global macro and quantitative strategies.
At the end of 2007, the pension fund employed 22 external fixed-income managers to handle 38 mandates worth Nkr128 billion. The list includes big names like Barclays Global Investors, State Street Global Advisors and Putnam Advisory Co. NBIM also uses some of the biggest investment managers in the world, such as BlackRock Capital Management, Capital International and Fidelity Pensions Management, to handle 54 equity mandates totaling Nkr217 billion.
The capital strategies group, which is based in London, has eight portfolio managers and will take only a handful of positions of up to 10 percent in the stocks and bonds of individual companies, Slyngstad says. The positions will be worth far more than the $1 billion maximum that the pension fund typically holds in individual companies, but executives decline to say how much money the group will manage in total. Slyngstad wants to grow the team to 20 investment professionals by the end of the year and is looking for talent across Europe. He has already rented out the other half of the office floor in NBIMs London office to house the team.
The risk strategies group, based in Oslo, will work more like a macro hedge fund, making long and short bets on sectors and themes such as merger arbitrage or distressed debt. We want to invest where the risk premium is out of whack with the ordinary market, Slyngstad notes. This team now has three investment professionals but will grow to ten, he says.
In addition to making use of a wider range of strategies, Slyngstad is looking to post more of his investing staff overseas. At the end of 2007, 45 of NBIMs 178 permanent employees were based outside Norway. By the end of August, NBIM had 55 employees outside Oslo, of which 23 were in London, 24 in New York and eight in Shanghai.
Norway has already set itself the ambitious target of becoming one of the worlds leading active investors. Slyngstads corporate governance team focuses on the key areas of promoting investor ownership rights to ensure long-term financial returns; that includes identifying ethical issues, such as environmental damage, that could affect a companys performance. Norways citizens and politicians expect that the fund should act responsibly and look after their assets in an ethically acceptable way, NBIM said in its annual report.
Separately, Norway has drawn criticism for its exclusions, notably from the U.S. The ministry moved in May 2006 to exclude U.S. retail giant Wal-Mart for what it said were labor and human rights violations, including pressuring employees into working overtime without compensation, discriminating against women on pay and blocking attempts by workers to unionize. Norway needs to be very careful, says Benson Whitney, the U.S. ambassador to Norway. Their fund is one of the biggest in the world, and they will be copied by other governments. If you are going to be an example, you need to be a very good example.
The ministry review will take opinions from nongovernmental organizations, academics and the public before submitting a report on ethical guidelines to Parliament in the spring. It will consider whether the pension fund should invest part of its money to promote clean technology. Skancke says the ministry could support the establishment of a separate vehicle with a clear, fixed objective of supporting companies that produce climate-friendly technology, but he is adamant that the fund should not be tapped for basic budgetary purposes. The opposition Progress Party proposes using part of the fund for future pension payments and setting aside Nkr300 billion for a special infrastructure fund for roads and railways. The losses posted by the fund this year are fueling dissatisfaction with the governments policy, says party leader Jensen. There is an increasing public debate about the return of the fund, she says. People are critical that some of the money is not there anymore money that could have been invested in Norway.
Whatever the outcome of the political debate, scrutiny of Slyngstad and his team is likely to intensify both at home and abroad. Slyngstad, however, remains philosophical about bearing the weight of his countrys wealth on his shoulders, comparing himself to a surgeon. You have to be aware of the possibilities and consequences of mistakes but not let those thoughts distract you from the work that has to be done.
Time will tell if he has made the right diagnosis.