The investment strategy of the Nobel Foundation

Nobel Foundation

To all investors, Nobel Foundation deserve an in-deep study.

Nobel Life and the Origin of the Nobel Prize

Introduction to the Nobel Prize

The Nobel Prize was established in 1895 according to the will of Mr. Nobel, the famous Swedish chemist and inventor. The prize comes from the 31 million kroner donated by Nobel, and the first prize was 150,000 kroner. By 2022, Nobel Prizes have been awarded 615 times.

If so, Nobel’s legacy should have been spent long ago. But why are there more and more Nobel Prizes now? For example, in 2022 the prize money for each award is up to SEK 10 million. Moreover, since the first Nobel Prize was awarded in 1901, the Nobel Prize has not only not decreased, but has accumulated from the original 31 million kronor to 6.103 billion Swedish kronor.

Nobel’s life

In the mid-19th century, Alfred Nobel invented nitroglycerin explosives and made a lot of money from patent fees. He is also a businessman with a vision for business investment. He has successively invested and built factories in Europe and the United States, accumulating huge wealth.

Because Nobel had no wife and children in his life, he made a will before his death and decided to set up a fund for his entire estate to recognize people around the world who have made outstanding contributions in the fields of science, literature, and peace every year.

Origin of the Nobel Prize

Nobel’s huge legacy was scattered in different countries and under the jurisdiction of different countries. In order to understand the property rights and interests in it, it took the entrusting agency five years to sort out the clues and formally set up a foundation for management. In 1900, the Swedish government formally approved the foundation’s constitution, as well as the Swedish institution responsible for the awards and other related matters.

Nobel Prize

In 1901, the notional value of individual awards awarded by the foundation was approximately SEK 151,000, or nearly SEK 9 million at 2016 exchange rates, in six categories: physics, physiology, chemistry, literature, economics, Peace. By the 100th anniversary in 2001, the value of the award had risen to SEK 10 million, the highest amount ever in nominal and real value.

Nobel Foundation

The establishment of the Nobel Fund

After the first Nobel Prize was promulgated in 1901, the assets of the Nobel Fund from 1901 to 1946 decreased year by year. The main reason is that the foundation not only pays a large amount of bonuses every year, but also because the managers hired are the world’s top experts, in some years, the cost of fund management is even higher than the bonuses issued.

But Nobel made it very clear in his will that the principal cannot be moved, and must adopt stable financial management strategies such as bank deposits and purchase of government bonds. Only interest can be used for investment, but it cannot be used for risk comparisons such as stocks, real estate, and private equity.

The size of the Nobel Fund

In 1900, the fund’s total original capital was SEK 31 million, and by the end of 2021, assets reached SEK 6,103 million. In 121 years, the assets of the Nobel Foundation have doubled nearly 200 times.

The Crisis of the Nobel Fund

By the early 1950s, for the Nobel Foundation, it was only a matter of time before the prize was paid out. The Nobel Fund has been in decline due to an overly conservative investment model. Especially after the tax is deducted, the Nobel Fund is even more stretched.

In 1953, the total assets of the Nobel Foundation were only over $3 million.

The transformation of the Nobel Fund

After repeated applications by the Nobel Foundation, the Swedish government announced that the Nobel Prize would be exempted from tax, while allowing the foundation to invest in the stock market and real estate fields. The investment strategy finally turned from conservative to active.

After repeated applications by the Nobel Foundation, the Swedish government announced that the Nobel Prize would be exempted from tax, while allowing the foundation to invest in the stock market and real estate fields. The investment strategy finally turned from conservative to active. They found Foster Frys, known as one of the greatest investors of the 20th century.

The investment strategy of the Nobel Fund

Long-term investment

Under his leadership, the investment of the Nobel Foundation is no longer limited to bank deposits and public bonds, and has turned to high-risk and high-yield projects such as stocks and real estate. Most of the Nobel Foundation’s equity investments are in U.S. stocks, and they are invested in Dow Jones index stocks. In 1953, the Dow Jones Industrial Average just bought was only 280 points, but by October 16, 2021, the Dow Jones Industrial Average had risen to around 35,294 points, which is equivalent to a 126-fold increase in 68 years.

Minimum return target

In order to maintain the bonus payment and the normal operation of the foundation, the investment goal of the Nobel Foundation is to maintain an annual return on investment of at least 3.5%.

Portfolio

Based on this goal, the foundation has continuously improved its investment layout and formulated a basic investment plan. For example, the proportions of various assets in 2017 are as follows:

  • 50% stock
  • 18% fixed income assets
  • 7% of real estate
  • 25% of alternative assets

Benchmark index

In order to maintain the established goal of a long-term return of 3.5%, the Nobel Foundation has designed a set of benchmark indexes that integrate various assets to measure whether its short-term asset management level has reached the goal. Short-term results are assessed using a benchmark index similar to its normal portfolio, which includes:

  • 55% of stocks: 44% of the MSCI World Index and 11% of the Return Index, both including dividends.
  • 10% Bonds: Commerzbank All Bonds Index.
  • 10% Real Estate: Returns from the Nobel Foundation’s Real Estate Portfolio.
  • 25% Alternative Assets: Fund Composite Index in HFRI Funds.

Therefore, the foundation remains flexible and adjusts the composition of the investment portfolio at any time. This point is actually the same as the world’s largest Norwegian sovereign fund mentioned in my blog (please refer to my blog posts “What investors can learn from GPF (Norway Sovereign Wealth Fund )” and “How great Norway Sovereign Wealth Fund (GPF) is“). The way of manipulating is similar in the general direction.

For example, in 2019, the foundation adjusted its investment strategy again, of which 47% were stock funds and stock index options, 9% were real estate funds, 13% were fixed income assets, 31% were alternative assets, and 0.1% was reserved for possible currency hedging losses.

Social responsibility

The foundation is a signatory to the UN Principles for Responsible Investment (PRI) since 2016.

During 2021, the Nobel Foundation has continued to invest responsibly, primarily through the reduction of fossil fuel-related equities through its asset management company, as well as the divestiture of public equity portfolios of oil-producing companies. This is the same direction set by the Norwegian sovereign fund.

Nobel Fund performance in 2021

Asset allocation

By the end of 2021, the assets of the Nobel Foundation will reach SEK 6.103 billion. Excluding the value of property rights directly owned by the foundation, the investment capital will reach SEK 5.72 billion by the end of 2021. The asset allocation includes:

  • 55% private equity funds
  • 8% real estate/property funds
  • 16% fixed income assets and cash
  • 24% of alternative assets
  • -2% accrued currency hedging gain

The return

In 2021, the fund’s return on invested capital is +18.4% compared to the benchmark index’s +19.1%. Invested capital has grown by 59% over the past five years, while the benchmark index has grown by just 1%.

Returns of individual asset classes

Asset typeMarket valueReturnBenchmark index return
StockSEK 3.076 billion+33.7%28.5%
Fixed assetSEK 597 million+1.3%
Alternative assetSEK 1.313 billion +1.4%+6.4%
Real EstateSEK 432 million
Nobel Fundation
credit: wikimedia

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