Knut Kjaer, the founding chief executive officer of Norges Bank Investment Management (NBIM), which manages the country’s oil reserves, is urging the manager to learn from global best practice and introduce more flexibility into its investment management.
Kjaer, who is currently professor at The Business School of the Norwegian University of Life Science, held a recent lecture for an advanced course in asset management by the Norwegian School of Economics and Finance Society Norway. He noted that even if the Norwegian model has functioned well for over a quarter century, learning from global best practice should inspire change.
Specifically, he advises on a review of the investment mandate because of the lower expected returns and a more complex and volatile risk situation requires increased flexibility and a higher level of diversification in the reference portfolio.
“While the performance of the NBIM management against the reference portfolio has been thoroughly analysed by independent experts four times, it is not yet made any similar review of the quality and performance of the work done in the Ministry of Finance by setting the benchmark and all the subsequent changes and modifications – against the market portfolio and global best practice.”
Kjaer also recommends NBIM applying the whole capital market structure not only listed equities to its strategy.
“An increasing share of value creation takes place in the private markets. Much of the capital funding of the green energy transition will happen outside the listed markets. Unlisted real estate should be reintroduced as a separate asset class with meaningful allocation and a higher allocation to unlisted infrastructure use risk-factor based approach to compose a more robust portfolio, referening the Canada Pension Plan Investment Board (CPPIB) approach, as well as other large Canadian funds such as Ontario Teachers’ Pension Plan,” he explained.
Kjaer’s presentation compares the managment of NBIM with the CPPIB and the Government of Singapre Investment Corporation (GIC). While he urges the Norwegians to learn from its global peers, he also commends NBIM for low costs and transparency. “Nearly everything of data needed to assess performance is available on the website.”
According to Kjaer, changing the investment mandate from the country’s Ministry of Finance from extremely detailed instructions to focusing more on key risk parameters, while the board of NBIM remaining accountable for performance, would also be more in-line with global best practice.
Further, Kjaer urges the board to be required “to come up with a system of monitoring geopolitical and market fundamentals, update scenarios and establish a system for downside risk protection during exceptional circumstances”.
Additionally, appointing an independent council tasked with examining and evaluating various aspects of the fund, including geopolitical issues, would strengthen the competence in the governance structure. This suggestion, and others, echo those made by the Sverdrup Commission.
The Commission was appointed by Royal Decree in 2021 to examine the Government Pension Fund Global (GPFG) in a long-term perspective. The Commission was asked to analyse how various international economic and political developments may affect risk and return, as well as to assess the implications of these developments for the management of the oil fund.
Kjaer recommends that “the board of NBIM should follow the examples from GIC and CPPIB and create scenarios on a regular basis, stress test expected performance on the total portfolio against guidelines on maximum expected shortfall, and on annual basis inform the public about their view and always when appropriate, inform the Ministry of Finance when change in the mandate is required”.
NBIM declined to comment on any of the suggestions.
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