Norway may have a population of just 5.3m, but years of carefully saved North Sea oil revenues mean it enjoys the world’s largest Sovereign Wealth Fund. Worth $900bn, the fund aims to give the Norwegian government an alternative source of income should oil prices drop or the economy struggle.
With a remit to invest for the long term, but also remain liquid enough to be drawn on when needed, the fund has a very simple, and we think sensible, approach to investing.
Invest for the long run
Set up in 1990, long run investing is core to how the Norwegian Government Pension Fund or GPF, the fund’s official name, does business. The goal is to take the short term financial benefits of Norway’s oil reserves and spread them over generations.
We are firm believers in investing for the long run. The stock market is volatile and events can mean that even the best investments fall in the short term. However, over the long run quality should show, allowing the best companies or fund managers to deliver results. Although with investing there are no guarantees. Investments fall as well as rise in value, so investors could get back less than they invest.
A long term investment horizon also allows the power of dividend reinvestment to get to work. Over longer time periods dividends account for the majority of stock market returns, as illustrated by the graph below.
Contribution of dividends to total return
Past Performance is not a guide to the future
Source: Lipper IM, 23/05/17
The advantages of stocks and shares
The fund invests 60% of its $900bn worth of assets in stocks and shares, equating to around 1% in every company listed in the world. The Norwegian government recently raised the upper limit on what could be invested in global stock markets to 70%.
When investing for the long run, we think that makes complete sense. The Barclays Equity Gilt study (which looks at returns from shares, government bonds, and cash going back over 100 years) shows that over the long term shares have tended to outperform bonds, and significantly outperformed cash savings. In fact, the longer the investment is held the more likely this outperformance becomes – although of course there are no guarantees, and unlike cash, the value of your investment can go down as well as up.
With billions of dollars to spend it’s no surprise that the fund’s largest holdings are a litany of the world’s biggest companies. However, the top 7 holdings show a bias towards tech and pharmaceuticals, perhaps reflecting a willingness to act as the long term investors that these sectors often need. Six of the seven are listed in the US or Switzerland – two countries with historically strong currencies and stable political systems.
Stock | Listing |
---|---|
Apple | United States |
Nestle | Switzerland |
Royal Dutch Shell | United Kingdom |
Alphabet | United States |
Microsoft | United States |
Roche Holding | Switzerland |
Novartis | Switzerland |
Source: Norge Bank Investment Management, 23/05/17. Shares are listed by size of holding.
Diversification
The fund has a hugely diverse geographic exposure. Most large companies the world over include the near ubiquitous Norges Bank (the fund manager) somewhere on their shareholder register. In fact the fund is specifically banned from investing in Norway, so as to reduce exposure to oil prices and avoid overheating the Norwegian economy.
In recent years the fund has been increasing its exposure to ‘alternative’ areas of the market, such as property investments. However, this remains a small part of the overall fund, accounting for around 3.2% at the end of 2016.
Despite a portfolio that embraces a huge number of global stocks, the fund as a whole outperformed the global stock market during the financial crisis. In 2008 the fund’s value fell 23.3%, versus a 43.5% fall in MSCI World global stock market index. Outperformance was driven by good results from the group’s fixed income investments, an indicator of the value of a diversified investment strategy.
Breakdown of Investments in The Norwegian Government Pension Fund
Source: Norge Bank Investment Management, 23/05/17
Drawing the natural yield
The fund generated an average annual return of 5.7% between 1998 and 2015, or 3.8% after management costs and inflation. Ultimately of course savings are there to be used, and the GPF is no different.
The rules governing the fund mean that the government can withdraw no more than 4% of the fund each year. Thanks to additional oil revenues the fund has continued to grow over the period, but going forwards the government is considering restricting spending from the fund further, to just 3%. That should ensure that the future value of the fund remains intact (or even grows) and is available for future generations to draw on.
There is a message here for investors, particularly those looking to draw an income from their investments. The money built up during Norway’s oil boom is a one off benefit that will eventually fade away. By saving revenues and then drawing just the natural yield (or something close to it) the government is able to preserve the value of those productive years for generations to come.
What does it all mean for investors?
The sums involved may be unfamiliar, but the Norwegian fund’s basic investment approach can be quite easily replicated. Of course investing in virtually every company on earth is pretty impractical (as well as expensive!) but investing in a selection of funds can help to provide exposure to a large range of companies and asset types at a reasonable cost.
To help investors decide which funds suit their needs best, our research team collate the Wealth 150+, a selection of what we feel are the best funds available to UK investors.
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