NORWAY – Officials at Norges Bank Investment Management (NBIM), manager for the Government Pension Fund Global, have written to the Ministry of Finance to defend its use of active management, as the future use of the investment strategy comes under question.
About a year ago, the Ministry asked the sovereign wealth fund, also known as the oil fund, to evaluate the use of active management within its portfolio. The request came after the fund posted its worst results in history in 2008 with a 23.3% loss.
In a letter posted in English on Friday, but in Norwegian in late December, NBIM executive board chairman Svein Gjedrem and executive director Yngve Slyngstad said: "A passive, uninformed approach to operational decisions is an alternative without a sound theoretical or practical justification. Direct costs would be somewhat lower with this approach than with the current model. However, we would not be able to match the return on the benchmark portfolio. As a result, Norges Bank cannot recommend a passive strategy for the management of the fund."
They said active management has added annualised returns relative to the benchmark of 0.22 percentage points, just a hair below the target set by the government in 2001 of 0.25, despite the global financial crisis.
"After 12 years of managing the fund, our assessment is that the results of active management have largely been positive. Experience suggests that active management could make an important contribution to the return on the fund in the long term," Gjedrem and Slyngstad said.
Last year, the government hired Mercer, along with Andrew Ang, a professor at the Columbia Business School in the US; Stephen Schaefer, from the London Business School and William N. Goetzmann, from the Yale School of Management to develop a report on the use of active management.
On December 14, the professors released a report indicating the losses suffered from active management in 2008 and early 2009 by NBIM were due to "systematic factors which fared very poorly during the financial crisis".
The professors noted: "We recommend that, to the fullest extent possible, these factor exposures taken by active management be treated as part of the fund benchmark. We propose a new framework to implement this change. In the same way the fund has chosen to hold a significant position in equities to capture the equity risk premium over the long run, we recommend that other factor risk premiums be accessed by the fund to generate long-term positive performance."
The Ministry of Finance is holding a seminar on January 20 with industry experts to discuss the report's findings, as well as a report written by Mercer about the use of active management.
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