What investors can learn from GPF (Norway Sovereign Wealth Fund )


There are very few people with investment experience who have not heard of the Norway Sovereign Wealth Fund, or Norwegian Government Pension Fund (aka Government Pension Fund: GPF). It is very important. It is the most important sovereign and pension fund and pension fund in the world. I suggest should know what a sovereign wealth fund is, you can refer to the article I post before “Sovereign Wealth Fund (SWF)“.

This sovereign wealth fund has a lot to study. I wrote an article about it a few days ago “How great Norway Sovereign Wealth Fund (GPF) is“, and the second part is published today.

Direction and strategy

Overall investment strategy

The fund has a benchmark index defined by an external major market index provider, which imposes some restrictions and requirements on the manager of the trade. While pursuing performance, it also gives investment flexibility and opportunity; for example, providing a starting reference portfolio as a reference for investment strategies. These investment strategies are complementary and tailored to the following characteristics of the fund:

  • Fund allocation: through a reference portfolio that is more suitable for fund characteristics than the benchmark index; achieve the goal of improving market exposure and long-term risk.
  • Stock selection: The goal is to achieve excess returns compared to the benchmark index. The stock selection strategy is based on fundamental analysis of the business to enhance returns, thereby providing fundamental insights into investments and supporting the fund’s role as a responsible and active owner.
  • Asset Management: The goal is to generate better returns over time by locating assets, lending securities, and reducing transaction costs. The stock positioning strategy is to increase the investment return for the fund and reduce the number of transactions and costs in the case of market risk.

Reference Portfolio Started by the Fund

The reference portfolio includes many investment markets and industries and is exposed to systemic risk factors. In terms of 2020 equity, the internal reference portfolio returned 11.40%, 0.37% lower than the benchmark index, and contributed a negative 0.24% to the fund’s relative return. Among them, the reference portfolio’s overweight of value stocks and small stocks had a negative impact on total returns.

Extraordinary investment performance

During the 22-year period from 1999 to 2020, only 5 years of this fund had a negative rate of return, and except for the loss of more than 20% in 2009, the other 4 years were only small losses. For one of the world’s largest sovereign funds, it is very difficulty.

Governance of GPF

Good and transparent management

Norway Sovereign Wealth Fund is decided by the country’s Ministry of Finance and is regularly reported to Congress. The investment strategy is carried out through the management mandate of the Norges Bank, and the performance benchmarks are clearly defined and the behavior of the actual managers is clear; all management details are made public , clear and transparent.

Actively act as a responsible investor

In addition to stating that Norway Sovereign Wealth Fund has an ESG mandate in official documents, in 2018 the fund also publicly opposed MSCI’s proposal to include companies with different rights in the index in order to protect the interests of most investors. In 2019, petrochemical energy companies such as oil and coal have been greatly reduced, and large sums of money have been invested in green energy infrastructure to support many renewable energy projects and companies. In 2020, the fund blacklisted 12 companies based on ethical and climate justice concerns.

Do not shy away from reviewing

Regular research and review

Factor investing, which we often use now, comes from a 2008 research report; it found that 70% of the excess returns generated by active management of the equity portion of the fund were 70% higher than that of value, small-cap, Systematic risk factors such as kinetic energy and volatility. After that, some specific risk factors are selected for asset allocation, so as to obtain excess returns that are better than the broader market.

Prior to this, only relatively high management fees and high performance commissions could be paid to external fund managers. It later decided to implement these risk factor investment strategies on its own in order to reduce the huge investment costs. According to the annual report, it manages funds at a rate of around 0.07% per annum. It is hard to find a fund with such low fees and such excellent long-term performance in the market.

A model for risk management

Norway Sovereign Wealth Fund not only invests in equity of companies, but also in real estate and bonds; in order to balance risk diversification and the high liquidity of the fund. And from time to time, bonds and stock investments are sold to finance real estate investments. The fund’s annualized return of 6.3% over the past 22 years is an extremely difficult achievement, compared with 6.72% for the all-stock U.S. S&P 500 during the same period. In 2019, it also cooperated with Prologis, the world’s largest listed commercial real estate company, and jointly invested US$2 billion to actively invest in logistics and real estate mergers and acquisitions.

Flexibility of GPF

Proximity to the market and globalization

Understanding US stocks is the protagonist of the global stock market, so that the proportion of US stocks exceeds that of European stocks for the first time in 2020. In 2021, the fund will hold shares in 742 Chinese companies, with an annual increase of 35.75% in the value of the shares held, with a scale of over RMB 320.5 billion. Taiwanese prefer financial stocks with high dividend yields; as of the end of April 2020, the total market value of their holdings has exceeded NT$10 billion; they are major foreign shareholders of Heku Gold, Yongfeng Gold, Jingcheng Bank, and Taiwan Enterprise Bank. It is also the top 20 shareholder of Mega Gold.


Flexibility to adjust portfolio investment strategies

Although the size of the fund imposes many constraints; it does not suffer from the bureaucratic disease of large corporations, and the investment strategy is active and flexible, and can be actively adjusted at any time to obtain the best total return rate. Knowing that equities are the assets that are most helpful for long-term investing; increase equities allocation from 62% to 70% in 2018, while reducing fixed income asset classes.

In 2017, the asset allocation was simplified, from bonds in 23 currencies to only holding US dollar, euro and British pound government bonds, and abandoned the yen, emerging market government bonds and global corporate bonds. In 2021, it will even follow the example of Te Majian and invest a lot of money in venture capital, investing US$7.5 million in Amartha, an Indonesian P2P lending company.

I am the author of the original text, the abridged version of this article was originally published in Smart monthly magazine.


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