Norway's Pension Soars 20% in 2019

Alicia McElhaney of Institutional Investor reports that Norway's massive pension fund returned 19.9% last year:
Norway’s government pension fund had a banner year in 2019, returning a whopping 19.9 percent.

The Government Pension Fund Global announced its annual returns on Thursday, noting that 2019 was a record year in terms of returns measured in Norwegian krone. The pension fund, which managed a total of 10.09 trillion kroner (USD$1.1 trillion) through the end of 2019, said it returned 1.69 trillion kroner for the year, according to an announcement.

"2019 has been a great year in the fund’s history, driven by positive equity returns in all of the fund’s principal markets and in all equity sectors,” said Yngve Slyngstad, CEO of Norges Bank Investment Management, the bank that manages the fund.

According to the pension fund, the percentage-point return for the year was its second-best since 1998. This amounts to a turnaround for the fund, which lost 485 billion kroner in 2018, a 6.12 percent loss for the year.

For 2019, the pension fund’s equities allocation returned 26 percent, driving the year’s returns, according to the annual report. This is compared with a 9.49 percent loss on equities in 2018. As of December 31, 2019, 70.8 percent of the fund’s assets were invested in equities, according to the pension fund’s announcement.

The pension fund announced in March 2019 that it would divest from oil and gas production and exploration companies, a move it had been considering since 2017. 

But for 2019, 5 percent of the fund’s assets remained allocated to oil and gas equities investments, the annual report showed. It was a small decline from 2018’s 5.9 percent. This allocation returned 12.9 percent for the year, which the report said was the “weakest” performing equities sector for the year.

Royal Dutch Shell, a British-Dutch company that, among other things, extracts crude oil and natural gas, is in the fund’s top ten equity and bond holdings, the annual report shows.

The pension fund’s capital originated from proceeds from domestic oil drilling, which the government has engaged in since 1971, the annual report shows.

A spokesperson for the pension fund did not return a phone call seeking comment.
I suggest you carefully read Norway's Government Pension Fund Global Annual report here. It is extremely well written and very clear.

The record gains in 2019 aren't shocking. Norway's pension invests roughly 65% in global equities, 30% in global fixed income and 5% in global real estate, and the returns were solid in all three asset classes, especially global equities:

Given the Fund's large weighting in global equities, it's hardly shocking to see in years where stocks do well, this fund does very well and in years when stocks get clobbered, it gets clobbered too:

Of course, you can say the same thing about all pensions but Norway has a lot more beta risk than say Canada's large pensions which invest roughly 30 % to 50% in Private Markets (Private Equity, Real Estate, Infrastructure and Private Debt).

Norway's massive pension has a small allocation to Real Estate but give its mammoth size, it's not easy to increase it materially.

In July 2019, I asked whether too much beta is dragging down Norway and Japan. Well, it turned out beta was good in 2019, really good.

As shown below, North American markets (especially US market) is where the Fund has most of its equity, fixed income and real estate exposure:

This too isn't surprising. In fact, if you ask me, Norway's Pension Fund should be even more heavily weighted in US equities but given its European roots and global presence, it tries to balance out its exposure across geographies.

The Fund also has exposure to other "frontier markets":
The fund has investments in 22 countries normally classified as frontier markets. The fund had 24.1 billion kroner invested in these markets at the end of 2019. These markets are not included in the benchmark index from the Ministry of Finance: Bahrain, Bangladesh, Botswana, Croatia, Cyprus, Estonia, Ghana, Iceland, Kenya, Latvia, Lithuania, Malta, Mauritius, Morocco, Nigeria, Oman, Romania, Slovakia, Slovenia, Sri Lanka, Tunisia and Vietnam. It also has investments in four countries classified as frontier markets but not included in the FTSE index: Kyrgyzstan, Moldova, Tanzania and Ukraine. The fund had 0.5 billion kroner invested in these markets at the end of 2019. In addition the fund had 3.7 billion kroner invested in Saudi Arabia at the end of the year. Some of these investments are in equities listed on exchanges in other countries.
Emerging markets (including frontier markets) accounted for 11.3% of the Fund’s equity investments, but as shown below, the US equity market accounted for the bulk of the gains last year:

In terms of equity sectors, Technology companies performed best in 2019 with a return of 42.3%, but as shown below, the Fund is more heavily weighted in Financials which also performed very well last year:

Now, this is all fine and dandy, but as I stated above, when stocks are getting clobbered, Norway's Pension gets clobbered more because it's still basically a giant beta fund.

Stocks are getting slammed hard this week as fears of coronavirus spreading all over the world grip markets. At the close on Thursday, the Dow was down 4.4% to 25,767, the S&P 500 was down 4.4% to 2,978 and the Nasdaq was down 4.6% to 8,566. The S&P 500 has dropped 10% in six days, the fastest correction in history:

Year-to-date, the S&P 500 is down 7.8% (price return) and while all sectors are down, the steepest losses are in Energy, Materials and Financials:

This means while Norway's Pension had a great year last year, if this mess continues or gets worse, it will have a terrible year this year given its large weighting in global (especially US) stocks.

I honestly do not understand why Norway's Government Pension Fund Global hasn't started to invest more in Private Equity and Infrastructure.

Then again, new research from Harvard University and Stanford University shows that pension funds have given up billions of dollars in private equity gains because of their fee structures. According to this study, the “large variation in net-of-fee performance” suggests that pension funds could have earned $45 billion more in gains.

Maybe that's why Norway's Pension isn't rushing into private equity, it doesn't want to get eaten alive on fees (it should study the Canadian model more closely if that's the case).

One senior Canadian pension expert who once consulted the Fund told me they drag their feet and even in Real Estate, they took their time and invested in listed and unlisted real estate.

Still, the Fund does invest in unlisted real estate and here are the sector and geographic exposures:

Below, Yngve Slyngstad, CEO, Norges Bank Investment Management, elaborates on their approach to ESG, when managing their portfolio of over 9000 investee companies. Slyngstad also elaborates on the risks he is most concerned about, in this increasingly uncertain and challenging investment environment (October 2019). 

In September of last year, Slyngstad spoke exclusively to Bloomberg Editor-in-Chief John Micklethwait on the sidelines of the Norwegian Financial Research Conference in Oslo and discussed his concern over negative rates and why the $1 trillion wealth fund remains a long-term investor in the UK, despite Brexit.

Interestingly, as Slyngstad gets set to retire, not one woman applied for the top job, drawing criticism from those watching Norway's Pension very closely. The Fund’s deputy chief executive, 49-year-old Trond Grande, appears to be the clear front-runner to succeed Slyngstad.

Lastly, CNBC looks at the market turmoil on Thursday. This is a global rout, which isn't good news for Norway's Pension or other global investors. Watch the last clip to see how bad it got today.