What Do Norway's 2023 Fund Results Mean For Canada's Large Pensions?

AFP reports Norway's sovereign wealth fund hits record profit in 2023:

OSLO: Norway’s sovereign wealth fund, the world’s biggest, said Tuesday it raked in a record profit of 2.2 trillion kroner ($213 billion) last year, driven by tech stocks and a weak national currency.

The fund’s total value reached close to 15.8 trillion kroner last year.

The 16.1 percent return follows a huge loss in 2022.

“Despite high inflation and geopolitical turmoil, the equity market in 2023 was very strong, compared to a weak year in 2022,” said Nicolai Tangen, the chief executive of Norges Bank Investment Management.

“Technology stocks in particular performed very well,” Tangen said in a statement.

Fuelled by revenues from Norway’s state-owned oil and gas companies, the fund is aimed at financing future spending in the generous welfare state.

Around 71 percent of its portfolio was dedicated to equities, with stakes in 8,859 companies worldwide — or 1.5 percent of all listed stocks.

The return on its equity investments last year was 21.3 percent.

Its investment in tech shares has grown, accounting for 22.3 percent of its total equity investments last year compared to 14.5 percent in 2019.

The fund’s portfolio includes US tech giants Microsoft, Apple and Google owner Alphabet.

The return on its bond holdings was 6.1 percent while real estate investments fell 12.4 percent amid higher interest rates.

The fund also invests in unlisted renewable energy projects, which generated a return of 3.7 percent.

The decrease in the value of the kroner contributed to an increase in the fund’s value of 409 billion kroner.

Kari Lundgren of Bloomberg also reports Norway wealth fund has first underperformance in five years:

Norway’s $1.6 trillion sovereign wealth fund failed to meet its benchmark for the first time in five years due to losses in unlisted real estate even as stock markets rebounded.

The fund returned to profit last year, gaining 16.1%, equivalent to about $213 billion, according to a statement on Tuesday. It fell below its benchmark by 18 basis points, having recorded the previous miss in 2018.

Created in the 1990s to manage Norway’s oil and gas revenues abroad, the fund is the world’s biggest single owner of equities. Its returns are highly dependent on market movements.

“It’s been a really tough market for real estate generally, and debt levels have been pretty large,” Chief Executive Officer Nicolai Tangen told reporters in Oslo.

The fund’s losses in real estate drove an overall underperformance in 2023, as its property holdings mean that it owns less stocks and bonds, Deputy CEO Trond Grande said. That leads to a negative relative return when those markets do well, with real estate dragging down outperformance in both equities and fixed income.

The fund — known as Norges Bank Investment Management — invests according to a strict mandate defined by the Finance Ministry, and seeks to make most of its limited leeway. It also holds assets renewable infrastructure, but is barred from some asset classes such as private equity. US investments made up 46.9% in 2023, versus 43.1% a year earlier.

“It feels like a good place to be with a large part of the fund,” Tangen said during an interview with Bloomberg TV. “We are pretty happy with the mix we have now.”

Tangen has spent the past two years warning that the fund’s growth over the last 25 years isn’t likely to continue in an environment of where borrowing costs have risen from zero and inflation has again become a factor for investors to consider.

“We tend to be pretty close to the index unless we see big opportunities either way — and so now we are relatively equal weight,” Tangen said on Tuesday.

Speaking at the World Economic Forum in Davos earlier this month, Tangen reiterated he was bracing for lackluster performance from the markets in the years to come as inflationary pressures are likely to remain.

His steps toward benchmark-beating performance are to be more long-term, more contrarian and more active on the negative selection, he has said.

NBIM gained about 21% on stocks — which made up more than 70% of its assets — with a slight underweight tilt in the asset class. It edged up 6.1% on its fixed-income investments and saw its unlisted real estate holdings drop more than 12%, while the return on unlisted renewable-energy infrastructure was 3.7%.

The fund measures itself against a benchmark index based on the FTSE Global All Cap Index for equities and Bloomberg Barclays indexes for fixed income. The investor has argued for its mandate to be broadened to private equity, saying that buyouts in particular have meaningfully outperformed public equities.

Technology stocks and the energy sector are now equal weight in the portfolio, Tangen said.

“It really is a winner-takes-it-all economy and it’s amplified by AI because it’s so incredibly expensive to train the models that you really have the winners becoming bigger,” Tangen said Tuesday. “I think it will last for some time.”

The Norwegian government deposited 711 billion kroner ($68 billion) into the fund in 2023. The fund’s market value has now ticked up to $1.6 trillion.

Earlier today, I listened to the presentation on Norges Bank Investment Management's website where CEO Nicolai Tangen and Deputy CEO Trond Grande presented the annual key figures for 2023.

The presentation slides are available here

Some quick comments below.

Most of the returns came from equities as the Fund has 71% invested there:

And not surprisingly, most of the outperformance in equities last year came from Technology shares where the Fund was heavily invested:

In Canada, our large pension funds prefer to overweight technology in private, not public markets.

Now, in real estate, less than 5% of the Fund's total assets are invested in unlisted real estate which got hit, down 12% last year. However, I looked at the mid-year report and noted this:

Total real estate investments returned -2.0 percent for the first half and amounted to 3.9 percent of the  fund at the end of the period. Unlisted and listed real estate investments are managed under a combined strategy for real estate.

Unlisted real estate investments made up 58.4 percent of the overall real estate portfolio and returned -4.6 percent, while investments in listed real estate returned 1.7 percent. 

The main driver behind the negative return on unlisted real estate was the office sector, with US investments in particular falling sharply in value during the period. This was due mainly to increased vacancy, which means reduced income for investors. The return on the listed portfolio was also affected by the negative performance in the US office sector.

Why is this important?

Because as at the end of June, unlisted real estate was down 2% and at year-end, it was down 12%.

That tells me the Fund's appraisers significantly marked down unlisted real estate assets in the second half of the year as it became evident office vacancies weren't getting better and other sectors also faced challenges as rates hit financing (multifamily).

Importantly, if Norway's Fund is posting -12% in unlisted real estate, it doesn't portend well for the unlisted real estate portfolio at Canada's large pension funds (to be fair, I suspect Norway's Fund has a bit more exposure to offices but can't confirm this).

There were dramatic markdowns of unlisted real estate assets in the second half of the year and this is worth noting as Canada's large pension funds prepare to report their results.

I've already told people last week when I covered why CDPQ is integrating its real estate subsidiaries that I expect a challenging time in real estate as assets were marked down to reflect the clobbering publicly traded REITs took in 2022.

You will also notice that listed real estate did just fine for the Fund last year, up 17%, enjoying the market beta effect:

Does this mean unlisted real estate values will come back next year as assets are reappraised up?

It should but that all hinges on a lot of factors and it's too early to tell how these assets will perform in 2024.

Lastly, CEO Nicolai Tangen has been very clear that they expect lackluster results going forward as rates and inflation stay higher and equity prices come back to trend, especially tech shares.

In fact, one of their slides caught my attention because it clearly shows the Fund can get hit 30% if risk is repriced, the world remains divided and there s a debt crisis:

Maybe this is why Mr. Tangen is desperately seeking approval to invest a portion of the Fund's assets in private equity.

Alright, let me wrap it up, I enjoyed writing this comment, share it with your network.

Below, CEO Nicolai Tangen and Deputy CEO Trond Grande presented the annual key figures for 2023. We also heard from various experts in the fund, who provided a deeper insight into some specific areas and sectors of relevance in the year that has passed. The press conference was held on 30 January.

Second, CEO of Norway’s $1.5 trillion sovereign wealth fund, Nicolai Tangen, spoke Jan. 15 with Bloomberg’s Francine Lacqua at the World Economic Forum in Davos.

Next, CBS 60 Minutes recently had a segment on commercial real estate's "existential moment". I embedded a mini clip and full episode below.

Lastly, earlier today, Ken Griffin, CEO of Citadel, joined CNBC's Leslie Picker for a keynote session at the MFA Network Miami conference. Griffin discusses the U.S. economy, financial markets, Wall Street and his outlook for 2024. This is a phenemonal interview, make sure you watch it all.