Coronavirus Slams Norway's Giant Fund

Terje Solsvik and Gwladys Fouche of Reuters report that a hedge fund manager to lead Norway sovereign fund after $124 billion loss:
Norway’s sovereign wealth fund, the world’s largest, named a London-based hedge fund manager as its new chief executive on Thursday and said it had lost $124 billion this year as stock markets tanked due to the coronavirus pandemic.

Norwegian-born Nicolai Tangen, until now chief executive of AKO Capital, which he established in 2005, will take the helm in September, succeeding Yngve Slyngstad who announced his resignation last year.

“Tangen has built up one of Europe’s leading investment firms and has delivered very good financial results as an international investment manager,” Norwegian central bank Governor Oeystein Olsen said while announcing the appointment.

“He has extensive experience with equity management, which is the fund’s largest asset class,” Olsen told a news conference in Oslo.

The AKO Capital partnership has around 70 employees, managing around $16.4 billion, according to its own website.

By contrast, the Norwegian wealth fund is worth $930 billion - though that is down from $1.17 trillion in early February, before stock markets fell.

The wealth fund has huge market influence because it owns in region of 1.5% of the world’s listed shares. However it has seen the limit of its clout this year as the pandemic has wrought havoc.

Its investment portfolio dropped 16.2%, all but erasing the 20% gains made last year, while its stock market portfolio - its main asset class - has lost 22.8% of its value, it said.

The wealth fund, a unit of the central bank, is formally known as Norges Bank Investment Management. It invests the proceeds of Norway’s oil and gas industry in foreign stocks, bonds and real estate.


“This is not only a dream job, this is my boyhood dream job,” said Tangen via video link from London, comparing it to fellow Norwegian Ole Gunnar Solskjaer taking the job of manager at English Premier League soccer club Manchester United.

Asked what was his motivation for taking on the job given that he would be earning less money, Tangen told Reuters: “It is clearly not the money even though the salary is a very good leadership salary in Norway.”

“As a Norwegian this is a huge thing,” he said in a phone interview from London. “It is a huge honor to be asked and it is a huge responsibility to safeguard the capital of the country and the wealth of future generations.”

He declined to comment on the coronavirus outbreak, saying Slyngstad remained CEO until he took over in September.

Tangen will move back to Norway, where he is perhaps best known for donating a collection of modern art to his home town of Kristiansand, which plans to house it in a converted grain silo.

Norwegian business magazine Kapital last year estimated Tangen’s net worth to be 5.5 billion Norwegian crowns ($519 million). He could face the prospect of paying annual wealth taxes of 60-70 million crowns, likely far exceeding the salary from his new position.

Outgoing CEO Slyngstad earned 6.7 million crowns last year. He is stepping down after 12 years on the job, during which the fund’s value rose sharply thanks to rising stock markets and solid income from Norway’s energy sector.
I don't know much about Nicolai Tangen but I like what I am reading on his hedge fund's website:
We are long-term, patient and responsible investors, taking stakes in high quality, listed companies with outstanding managers. We have a rigorous, proprietary research-driven investment process.

By these means, we aim to achieve returns that materially outperform the market with lower volatility. Using estimates as at 24 March 2020, our European long-short fund has compounded at three times the rate of the market (9.9% versus the market 3.1%) since its inception nearly 15 years ago. Additionally, our European long-only fund has outperformed the market by more than 4% per annum (9.8% versus the market 5.5%). As at February 2020, we had generated more than $8.6bn in profits for our clients across all AKO funds.
Now you understand why Mr. Tangen is one of the wealthiest Norwegians in the world, his fund has delivered great results for his clients over the long run.

He's obviously not taking over the helm of Norway's sovereign wealth fund for money but for the challenge of steering this giant ship through challenging times.

I've repeatedly said that Norway has a giant beta problem. Beta is great on the way up, like last year when Norway's Fund soared 20%, but it really bites you hard on the way down, like Q1 2020 which will be one of the worst the Fund ever experiences (we shall see, it's not over yet).

Let me be more specific, Norway takes on too much public equity risk which exposes the fund to too much volatility. Who cares? It has a long-term focus and can absorb all this volatility.

True, but it can and should do a lot more to deliver more consistent and higher risk-adjusted returns over the long run.

Let me give you an example. Look at CPPIB's asset mix as at March 31, 2019:

Even though it's a year old, it hasn't changed much. Just like Norway's Fund, the CPP Fund also takes equity risk, lots of it, but it spreads it more evenly between private (24%) and public equities (33%).

More importantly, it invests and co-invests with top private equity partners all over the world, ensuring great long-term performance and significantly reducing its fee drag.

It also invests in infrastructure, real estate and private debt all over the world, further diversifying its portfolio.

Now, don't get me wrong, CPPIB and other Canadian pensions aren't immune to what is going on out there with this pandemic. Private equity, real estate and infrastructure investments are getting hit too.

For example, CPPIB owns 50% of Highway 407 and it will take a hit from the fact that this toll road won't generate the toll revenue over the next few months. OTPP owns major stakes in European airports, it too will get hit on these infrastructure investments over the short run.

Longer term, however, these investments will generate significant cash flows and even if they are marked down temporarily, they will bounce back.

The same thing for real estate and private equity investments. Of course they aren't immune and even if they're not marked to market, they too will experience significant losses, but over the long run, they will bounce back.

By the way, private equity firms have a record $1.5 trillion in cash ready to deploy and have been actively seeking deals across the struggling travel, entertainment and energy industries. They have been waiting for this type of market dislocation for a long time:

I was talking to someone earlier today who told me "this year will be a great vintage year" for PE firms and I agree.

But Norway's giant fund doesn't invest in private equity or infrastructure, only a bit in listed and unlisted real estate (less than 3%), so its portfolio is marked to market and that means it's much more susceptible to large market swings.

Now, I don't want to belabor the point of market swings because every large pension and sovereign wealth fund will experience huge losses in Q1 2020, as will well-known investors getting crushed in these markets:

But Berkshire has $120 billion in cash to deploy and I'm sure Buffett is buying up great companies. I can say the same about Norway, CPPIB and other large funds, they will be buying great companies at deep discounts.

But it is a very challenging environment and all sorts of gurus are coming out to make their prognostications:

For what it's worth, here is mine, I wouldn't get too excited about this week's snapback relief rally.

Why? It's end of quarter, a lot of pensions and sovereign wealth funds are rebalancing, selling bonds and buying up equities, so I expected a big bounce but is it sustainable?

Here are a couple of charts I posted earlier today on LinkedIn stating: "Notice the S&P 500 ETF (SPY) rallied back to its 200-week moving average (and close to its 20-day EMA) but here is where things will get sticky folks so temper your enthusiasm, this is as much of a V-shaped recovery as you will see for the time being":

Stocks are experiencing a great week but we all expected a big relief rally and these are the easy gains. It remains to be seen how sustainable these rallies are in the face of a coravirus pandemic where the US economy is getting hit hard:

No doubt, stocks move in anticipation of a recovery, but it's way too early to talk recovery given we're in the eye of the storm.

Moreover, it's important to note that this horrific jobless claims report is actually worse than meets the eye, it's only the beginning of a deluge of negative economic news and the economy won't bounce back quickly:
“There will be a very significant drop back in unemployment when the number of new coronavirus infections fall and the economy begins to reopen, but it won’t reverse all of these losses,” Capital Economics’ Ashworth said. “The unemployment rate could remain elevated for years.”
Lastly, it really irritates me when some private equity boss slamming the German government for its response to the cornavirus outbreak, stating "I'd rather have the flu than I would a broken economy":

Unbelievably, this guy is a former surgeon who should know better (he comes across as an arrogant jerk!):
The 60-year-old Dibelius, who began his career as a surgeon, appeared to be an adherent of the herd immunity strategy. This involves allowing parts of society who would likely suffer mild illness from the virus to become immune.

«I'm more afraid of the collective shutdown of the economy and social welfare, conducted with nearly no discussion and with the argument of morality, than I am of the virus itself,» Dibelius said. «I'd rather have a flu than I would a broken economy.»
I'm not saying he's completely out to lunch but herd immunity is a dangerous strategy which can backfire in a spectacular way, which is why the UK did a 180 degree turn and dropped it.

This is also why governments are desperately trying to flatten the curve not to overwhelm their healthcare system. From what we know, this virus is hitting a lot of younger people in New York where the hospitalization rate (18% in article but 40% today) is twice as high as the global average, so I'm not so sure "herd immunity" would have worked there:

Luckily, more informed voices are stating we need an "extreme shutdown" to deal with this outbreak and I think they are right as are the experts who state "the virus sets the timeline" of when the economy can reopen safely:

On that note, it's a good time to remind my subscribers that Pension Pulse runs on donations, not government handouts. I thank those of you who take the time to donate and/or subscribe using the PayPal options on the top left-hand side of this blog. Stay safe everyone.

Below, hedge fund manager Paul Tudor Jones, founder of Tudor Investment and JUST Capital, tells CNBC's "Squawk Box" that he thinks the market could be higher as soon as three months from now despite what he sees as a turbulent month ahead.

Niall Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University, joins "Closing Bell" to discuss the coronavirus outbreak and why Paul Tudor Jones is wrong stating 40K will die in a worst case scenario.

I think Ferguson is right, this isn't the flu (hate idiots who claim so) and we still don't know how this virus will play out in the coming weeks and months.

Also, if you heard Dr. Anthony Fauci on CNN last night, he stated there will be second and third waves and that Africa and Australia are going into their winter season and this virus will erupt there and lurk. He's also right: "the virus sets the timeline" (I also like what he says about vitamin D, it doesn't hurt and I take 20,000 IUs once a week).

All this to say, stop listening to hedge fund gurus or brokers, when it comes to COVID-19, I only listen to infectious disease experts like Dr. Fauci, Dr. Birx and a few others like professor Hugh Montgomery who thinks the UK will be unable to cope with the 'tsunami' of coronavirus cases.