The Norwegian government has ruled out allowing either of its sovereign funds to invest in unlisted infrastructure and ignored calls from the Government Pension Fund Norway (GPFN) to broaden its mandate to include real estate.

Folketrygdfondet, which manages the NOK198bn (€21.4bn) Government Pension Fund Norway (GPFN), saw its calls to diversify the fund’s portfolio ignored by the Norwegian Ministry of Finance, which said any diversification benefits stemming from a move into real assets could be achieved “by other, simpler means”.

However, the government gave the larger Government Pension Fund Global (GPFG) permission to expand its unlisted real estate allocation to 7% of assets, up from 5%.

In its annual report to Parliament on the management of both sovereign funds – the GPFN and the substantially larger globally focused counterpart – the Ministry said the domestic infrastructure market was “small and underdeveloped”.

“Any investments in infrastructure by the GPFN will most likely result from the sale of such assets by the central or local government,” the report said.

“Such a change of ownership will leave the state’s overall risk level unchanged, and usually generate significant transaction costs.”

The fund, which returned 7% last year, is currently limited to investing in equity and fixed income. Of its total portfolio, 85% must be invested in Norway, with the remainder able to be invested in neighbouring Scandinavian countries. 

With respect to the NOK 7.5trn GPFG, the Ministry said it was “uncertain whether unlisted infrastructure improved risk diversification or raised expected returns”, arguing that only 0.5% of the global investable market was currently unlisted infrastructure.

Finance minister Siv Jensen said: “A number of important factors indicate that investments in unlisted infrastructure should not be permitted.

“Such investments are exposed to high regulatory or political risk. Conflicts with the authorities of other countries regarding the regulation of transport, energy supply and other important public goods will generally be difficult to handle and entail reputational risk for the fund.”

She added: “The government considers that a transparent, politically endorsed state fund like the GPFG is less suited to bear this type of risk than other investors. Following an overall assessment, the Ministry is not prepared to permit the GPFG to invest in unlisted infrastructure at this stage.

Jensen said it would be useful to gain greater experience with unlisted real estate before considering other unlisted asset classes – likely a reference to the now-rejected infrastructure allocation, or the exposure to private equity long desired by Norges Bank Investment Management (NBIM).

The Ministry’s decision to grow the unlisted real estate allocation comes more than a year after the government commissioned a review, led by London Business School’s Elroy Dimson, on the current 5% cap on real estate.

Real estate performance will also be benchmarked against a reference portfolio of equities and bonds.

This would move the GPFG in line with some other large institutional investors that use a similar ‘opportunity cost model’, including the Canada Pension Plan Investment Board.

“The investments will be evaluated against a broadly composed index that can, in principle, be followed closely at low cost,” the Ministry said in a statement.

The new approach should give NBIM more flexibility when it comes to deciding on new real estate investments.

But the organisation will need to ensure real estate investments stay below the 7% limit to avoid any forced selling should the GPFG’s listed investments suffer significant falls in their value.

The decision to increase the real estate exposure comes at a time when the government awaits a review of the GPFG’s equity allocation, due in October, which could also see an increase in the equity allocation beyond its current 60%. 

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