Norway wealth fund could allocate up to US$80b to outside firms

[OSLO] Norway's sovereign wealth fund, the world's biggest, wants to allocate a larger chunk of its US$1.3 trillion portfolio to external asset managers, describing their performance so far as "fantastic."

The Oslo-based investor already raised its allocation target for external asset managers at the end of last year, bringing it to 5 per cent from just under 4 per cent. It will now "increase that somewhat," up to 6 per cent, according to Trond Grande, the fund's deputy chief executive officer.

The model applies mostly to the fund's equity portfolio in emerging markets, and this means as much as US$80 billion will be handled by outside asset managers.

"As long as the strategy is to use this to manage equities in emerging markets, there are also limitations on the size of these markets," Mr Grande said in an interview on Wednesday. "Emerging markets account for about 10 per cent of the equity portfolio, so there are some natural limitations as long as the strategy is what it is."

Mr Grande spoke after the fund unveiled a strategy update in which it said its goal was to "emphasise specific, delegated active strategies and have less emphasis on allocation or top-down strategies." The shift in focus comes as institutional investors everywhere are trying to gauge the likelihood of a sudden return of inflation that might upend their portfolio strategies.

Nicolai Tangen, a former hedge-fund manager who's been CEO of Norway's wealth fund since September, said the potential resurgence of inflation could "derail" the current market. Figuring out when such a correction might come is "something we look at a lot internally," he said.

Things have "gone very well for a very long time," he said. "But there's risk in these markets. Interest rates are low and inflation is currently low. The market has risen a lot, despite the fact that earnings in many sectors have actually fallen during the crisis. There are no cheap sales out there in stocks."

Mr Tangen has tried to prepare the wealth fund for any sudden bouts of volatility, which has included exposing his portfolio managers to some of the training techniques that help drive top athletes. He says the idea is to ensure they're able to deal with extreme stress without making bad investment decisions.

Part of the fund's risk management will include stepping up research on so-called negative selection, which includes techniques such as forensic accounting. "Our aim is to expand our negative selection by under-weighting stocks we expect to underperform," it said.

The fund, which generated US$123 billion in returns last year, used a previous strategy update to shift its equity exposure toward US stocks and away from Europe. Much of last year's performance was driven by the fund's holdings of US technology stocks.

Mr Grande says the fund still has room to add risk within its current investment framework. The fund's mandate gives it a so-called risk budget that lets it veer 125 basis points from its benchmark. For now, it's tended not to exceed 30-50 basis points, according to Mr Grande.

"There is a relatively modest utilisation of the risk framework," he said. The fund's first ever investment in renewable energy infrastructure, announced on Wednesday, is the kind of exposure that draws on the risk budget.

"The active part of risk-taking in the fund is limited," Mr Grande said. "We are close to the index in the management we run."

BLOOMBERG