Biggest wealth fund sits out liquidity trap

Norwegian fund has more than tripled in size since global crisis

The world’s biggest sovereign wealth fund can afford to wait longer than you can. Trades made by Norway’s $890 billion (Dh3.2 trillion) Government Pension Fund Global can take an hour, or they can take as long as six months, according to the chief investment officer for asset strategies.

The fund, which invests Norway’s oil wealth in foreign stocks, bonds and real estate, relies on being able to execute massive transactions to build its portfolio. That leaves it particularly exposed to two challenges that have grown over the past years: fewer but bigger investors, and less liquidity. Its response is to try to keep trading to a minimum, and stretching transactions over as much time as needed to keep costs in line, CIO Geir Oivind Nygard said in an interview on Wednesday.

“We’re a long-term fund, so we take our time to trade as cheaply as possible,” Nygard said. “You can always find liquidity if you’re willing to pay. We wish to stretch it out in order to find the natural buyer or seller.” Geir Oivind Nygard joins NBIM’s leader group at a time when the fund’s inflows of fresh capital from Norway’s petroleum industry have dwindled following the oil-price collapse that started in 2014. For the first time since it was set up in the 1990s, the government withdrew money from the fund last year, and it plans to increase the amount it takes this year to 121 billion crowns. That’s still far from what the fund makes in dividends, interest payments and property rental fees, which is estimated to be about 200 billion crowns a year, meaning Norway’s fund hasn’t been forced to sell off assets to cover withdrawals.

The fund has more than tripled in size since the global financial crisis and owns about 1.3 per cent of the world’s listed equities. Its magnitude, and especially its long-term horizon, are strengths. But size is also a challenge as large trades get more complicated and costlier both for equities and bonds, despite the fund’s success in cutting average trading costs over the past years, Nygard said.

“You’ve gotten a concentration which has made the market more homogeneous in a way,” he said, referring to a development over the “past couple of decades.”

Challenging

“When you trade in size, there are few natural buyers or sellers to play on,” he said. “That’s become more challenging.” Difficulties have especially increased in bond trading, where liquidity is “more scarce than 10 years ago,” Nygard said. Management costs stood at 0.06 percentage point in 2015, stable from the year before and down from 0.08 percentage points in 2011. The fund’s annual trading volume in stocks is comparable to that of the Oslo Stock Exchange, where equity turnover reached about 1 trillion crowns ($120 billion) in 2016.

Nygard, 36, succeeded Oyvind Schanke on January 1 after acting as interim CIO for a month. He has worked for Norges Bank Investment Management, the central bank unit that manages the fund, for 10 years, most recently as global head of portfolio management.

The withdrawals have increased the fund’s trading volume “a bit,” but have very little effect on the mandate of the unit overseen by Nygard, he said.

Still, with no fresh capital coming in there’s less wiggle room at a time when the fund is trying to boost investments in real estate. It tries to match new investments with money coming in, such as bond payments, Nygard said.

“There may sometimes be a mismatch, and we would then need to finance that in the meantime,” for example by selling assets, he said.