Wednesday, November 3, 2010

Norwegian Govt Fund's 'Reprehensible' Fees?


Daniel Brooksbank of Responsible Investor reports, Norwegian Govt Fund under fire over ‘reprehensible’ external managers’ performance fees:
The Norwegian Finance Ministry has fended off criticism from the state spending watchdog about controversial performance fees paid by the country’s central bank to external fund managers that run assets for the NOK3trn (€365bn) Government Pension Fund.

The Office of the Auditor General recently issued a report to the Storting, the parliament, that was highly critical of Norges Bank Investment Management (NBIM), the arm of the central bank which runs the fund.

It revealed that one manager – named in the Norwegian media as Malaysia’s Pheim Asset Management – received fees of around NOK500m (€61m) for running a mandate valued at NOK3.3bn (€402m) at the end of 2009.

“It is considered reprehensible that Norges Bank entered into a contract with an external manager without determining an upper limit for performance-based remuneration,” the auditor said. Before the contract – originally signed in 2008 – was renegotiated, the fee would have been even larger, at NOK900m.

“This is so large, both in terms of the amount and percentage, that the signed agreement must be deemed to warrant criticism,” the auditor said. The comments come in a detailed 274-page probe of all government spending.

Hilde Singsaas, State Secretary at the Finance Ministry, issued a statement saying that when external managers earned high fees it meant the fund had earned far more. The fees furore has been compounded by press revelations in Norway that Pheim has been sanctioned for contravening market rigging provisions in Singapore. In September, Pheim and its CEO Dr Tan Chong Koay were ordered to pay civil penalties totalling SG$500,000 (€276,793), as well as legal costs to the Monetary Authority of Singapore, by the Singapore High Court.

NBIM
charged the Govt Pension Fund NOK3.2bn in management costs in 2009 – of which NOK1.8bn went to external managers. Of that figure, NOK1.4bn was in performance-based fees.

The Finance Ministry told the auditor that responsibility for external managers lies with the central bank. But the auditor report questioned whether the Ministry had fulfilled its oversight of the bank.

The auditor also expressed concerns that the fund had continued to hold bonds of companies – Rio Tinto, Barrick Gold and Textron – that had been excluded from its investment universe for ethical reasons.

Singsaas said the Ministry of Finance would consider calls to cap managers’ fees: “The basis for such an assessment must be what best protects both the fund’s financial interests and its reputation.”
Any way you slice it, that's a lot of fees being doled out by this giant fund. Apart from the specific concerns cited by the Auditor General, I'm also wondering if performance fees are being paid for what is essentially beta. Remember, you can swap into the beta of almost any index at a fraction of the cost, so why dole out huge external manager fees? To be fair, this is what the Fund mostly does, managing the bulk of assets internally, just like AIMCo and PSP Investments.

The Government Pension Fund Global is very transparent and its mandate is unique. You can view the list of external managers on their website. I noticed a Montreal fund, Sectoral Asset Management, a leading healthcare fund. In cases like Sectoral, it's worth paying performance fees because they typically outperform their index by a wide margin. I can't comment on the other funds because I do not know them well enough.

Another thing you should bear in mind is unlike pension funds, the Government Pension Fund Global only invests in liquid equities and bonds (the fund received a mandate in March 2010 to invest in real estate but it has not awarded any external real estate mandates yet). This means it is exposed to market moves, or beta (note: the expected tracking error limit is 150 basis points, or 1.5 percentage points).

Finally, take the time to go over a speech by Governor Svein Gjedrem at the Norwegian Polytechnic Society on 2 November 2010, Perspectives on managing the Government Pension Fund Global. It is well worth reading to understand how this monster fund is being managed.

While the Auditor General issued a critical report, it's also worth pointing out many positive attributes of the way the Fund is being managed. Norway's Government Pension Fund-Global is tops when it comes to transparency and accountability among sovereign wealth funds, according to a recent ranking from the Peterson Institute for International Economics. The Fund recently grew to NOK3trn ($512bn) for the first time in its 14-year history. Keep an eye on this Norwegian giant, they're already a global powerhouse and they're going to be a force to be reckon with for many years to come.

***Update: First Foray into Real Estate

The Government Pension Fund Global has made its first investment into real estate. The fund will pay US$730 million to buy a 150-year lease on a 25% stake in The Crown Estate Regent Street's properties in London.

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