How Norway’s $1tr wealth fund selects managers
The man who oversees external investment at Norway’s $1 trillion sovereign wealth fund is getting very itchy feet thanks to the Covid-19 lockdown. For an institutional investor that is extremely ‘high-touch’ with its asset managers, four months (and counting) feels like an age for on-site visits to be off-limits.
“Usually we meet all of our managers three to five times a year, regardless of where they’re based,” Erik Hilde, global head of external strategies at Norges Bank Investment Management (NBIM), told AsianInvestor by video call from Oslo. Fewer trips will be made to managers it has worked with for a long time.
And NBIM – believed to be the world’s biggest sovereign wealth fund – has a lot of relationships. It was invested with 83 managers as of the end of 2019, all of whom are active public equity managers, and about three-quarters of whom are emerging market-focused (see figure 1 below).
Asia-Pacific accounted for a little over half of all of NBIM’s 260-odd emerging market equity mandates as of end-2018, according to an external manager study that it published in April. The region received around 20%, or NKr1.43 trillion ($145 billion), of its 70.8% allocation to equity as of end-2019, shows the fund’s latest annual report, published in February.
That is why Hilde’s team makes a lot of long trips. “This is a true leather-burning activity,” said Hilde, who has been at NBIM since 1998, when it started investing. “But obviously it’s very interesting – which is why I’ve been doing it for so long.”
Admittedly, the fund has been checking in with managers more often than usual in recent months, but that level of communication doesn’t fully satisfy Hilde. “So I hope this [lockdown] will end soon.”
NBIM never hosts managers at its own offices; Hilde has not done so for at least a decade. “We like to meet them at their desk, in their operating habitat, to understand why and how they have an edge,” he said. This approach also allows the fund to get to know the entire investment team face-to-face.
SMALL IS BEAUTIFUL
NBIM also tends to prefer employing smaller, privately owned houses. They have a stronger focus on attracting and retaining talent and offer a greater alignment of interest than large managers, Hilde said.
This is important because if the key portfolio manager or any senior members of the investment team working on its portfolio were to leave, NBIM would terminate the mandate right away, said Hilde. That gives a boutique manager a huge incentive to retain talent and thereby hold on to what is likely its biggest client.
“We would ideally like to select a manager for a lifetime,” he added.
The focus on smaller local managers also fits well with NBIM’s decision to ditch regional and global mandates. Since 2012 it has awarded only single-country equity mandates (see figure 2 below). The fund also bucks the rising trend among large institutional investors to work with fewer partners.
That’s not to say that NBIM doesn’t hire big firms: “They can have advantages in countries where access is difficult, and where they can benefit from economies of scale.” But they can also sometimes have more rigid structures, inefficient and longer communication lines and less accountability, Hilde noted.
Given its very long-term approach, NBIM may well increase funding to managers it considers strong, even when they have lost money, taking the view they will recoup the losses, Hilde said. On the flip side, it might also reduce the funding of an outperforming manager.
IN-HOUSE OR EXTERNAL?
For its equity investments, the fund has in-house sector-focused portfolio managers, mainly covering developed markets, and external managers, largely investing in emerging markets and small-caps in developed markets. It also has an internal enhanced index team.
“For each country, we decide whether to use the active equity approach or internal enhanced indexing,” Hilde said. “Our focus is not allocating between countries, but the right investments within each country.
“From the start, we chose not to use external managers for quant strategies,” he added. “We feel they are better handled internally, so we can construct models directly and use our significant asset base to implement them.”
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In addition to its use of technology for quant investing, the team has ramped up its use of tech for monitoring external managers and built tools in-house that extract data from its internal database.
“All of our external managers run segregated accounts for us, so we have a daily overview of what they are trading,” Hilde added. “We have constructed a lot of tools to analyse what, when and how they are buying and selling.”
Beyond equities, NBIM buys listed infrastructure and it started investing in private real estate in 2010. It does not yet allocate to private equity, though last year it received approval to invest in unlisted renewable infrastructure.
CORE COMPETENCE
Fundamentally, the sovereign fund sees manager selection as a “core competence”. That is a key reason why it has never used investment consultants, Hilde said, despite the in-depth knowledge that many possess.
“Employing external managers is an investment decision,” he explained. “To be able to make the best investment decisions, it is important to acquire all the first-hand information from existing or potential managers.”
NBIM’s partnership model clearly takes a lot of time, effort and adaptability to get right – just like all worthwhile, long-term relationships. Done well, it benefits both sides and the investment industry as a whole.
Both asset managers and asset owners should take note.
This article is an extract from an interview that appears in the latest (Summer 2020) issue of AsianInvestor magazine.