When the world’s biggest sovereign wealth fund proposes to dramatically change its investment approach, other institutions tend to take notice.
Norway’s Norges Bank Investment Management (NBIM) said on Friday that it aimed to overhaul its fixed income benchmark by limiting it just to government bonds denominated in dollars, euros or sterling (instead of the current 23 currencies), and with maturities of around 10 years or less.
While the $1 trillion fund's latest action is seen as unlikely to be aped wholesale by other state investors, it is still likely to have some impact. And, interestingly, it comes just two days after chief executive Yngve Slyngstad appeared to pull back from plans to diversify into private equity or infrastructure.
Under the new proposal, NBIM’s goal is to better reflect the purpose of its bond investments, which is to reduce fluctuations in the overall return, ensure adequate liquidity and provide exposure to risk premiums in the bond market. The fund said it would not reduce its universe of potential fixed income investments – only the benchmark composition, against which portfolio returns are measured.
Even so, the proposed change to the bond benchmark – explained in a public letter sent to the Ministry of Finance and dated September 1 – caught industry experts off guard.
“I was genuinely surprised at such a dramatic realignment of guidelines,” said Elliot Hentov, head of research in the official institutions group at US fund house State Street Global Advisors.
It would make “eminent sense” for a smaller fund – say, $10 billion in size – to improve governance and organisation efficiency by simplifying its guidelines and benchmarks, he told AsianInvestor. But it’s harder to justify such a move for an institution as large as NBIM, said Hentov, who is based in London.
The head of sovereign wealth funds at another asset manager said it was “interesting” that a very long-term investor such as NBIM wanted to remove long-dated bonds from its benchmark.
“Which generation are you looking to provide for?” he said on condition of anonymity. “An 100-year bond is a next-generation bond, but a 10-year bond is only for this generation.”
That said, from a multi-asset perspective, NBIM is earmarking fixed income as the liquidity tranche of its portfolio, with equities acting as the investment tranche, added the SWF head. “If you look at it like that, it makes sense.”
Hentov agreed: “There’s a good logic to the objective of the fund’s bond portfolio – to stabilise returns, mitigate risk and provide liquidity. All that makes a lot of sense.
“But of all the sovereign wealth funds in the world, I would think Norway’s is one one of those with the least need to be cautious about maintaining liquidity buffers,” he noted. “Liquidity cannot be be a strong factor here.”
As for the other two factors that the fund mentioned – risk and volatility – Hentov argued that NBIM could still achieve its goals by using other bond currencies and maturities. “It need not be so drastic [in its changes] to achieve its targets,” he added.
Will others follow NBIM down this route? Unlikely, said Hentov and the unnamed executive. But Hentov did think it would have some form of knock-on impact.
“Norway is a pioneer when comes to transparency, ESG [environment, social and governance factors], designing its benchmark and many other aspects of sovereign investing,” he said.
The move will probably not act as a trigger for others to do the same, noted Hentov, but it may well inspire other funds to proceed with other ways of achieving their desired portfolio outcomes.
Most SWFs were founded in the past 10 to 15 years and have only recently started to experiment with broadening their asset classes, deepening their investment capacity,” he said. “This declaration by Norges Bank may inspire some to stick with what has been working; to set those successful strategies as the portfolio norm.”