Norway $570 Billion Oil Fund May Target Private Equity as Adviser Switched

Norway’s $570 billion oil fund may get more leeway to expand into new asset classes such as roads, gas pipelines and unlisted shares as the government switches its top adviser for setting the investor’s guidelines.

Former central bank Governor Svein Gjedrem, 61, this week started as secretary general at the Finance Ministry and chief adviser on investment rules for the oil fund, succeeding 64- year-old Tore Eriksen. The switch allows Gjedrem to revive proposals blocked by the ministry in April to expand the fund’s investments, according to Knut Anton Mork, chief economist at Svenska Handelsbanken AB in Oslo.

“Gjedrem is a person of very powerful ability of persuasion,” Mork said by phone. “The ministry will do what he wants. I see no reason why Gjedrem should have changed his view on this matter and against that background I expect the ministry to change course and allow for these new asset classes.”

Gjedrem, who declined to comment on how he will advise the ministry when contacted by e-mail, started his new job on June 11. He argued last year that the oil fund is “well-suited to harvest liquidity premiums from infrastructure and private equity investments,” in a report co-written with the fund’s Chief Executive Officer Yngve Slyngstad.

Eriksen, by contrast, said in an interview last week that the fund needs to adopt a “conservative” approach and avoid “experiments” after it lost a record $116 billion at the height of the global crisis in 2008. The fund cut its Greek debt holdings in the first quarter, after last year raising its positions in bonds sold by Europe’s most indebted nations.

Bigger Returns

On Jan. 1, the range by which the fund can deviate from the benchmark it tracks was cut to 1 percentage point from 1.5 percentage points. The fund returned 9.6 percent last year as stock markets rallied, adding to a 26 percent gain in 2009. It grew 2.1 percent in the first quarter, the smallest return since the second quarter of 2010, as European bonds slumped.

The fund probably overtook Abu Dhabi’s Investment Authority to be ranked the world’s biggest this year, Massachusetts-based Monitor estimates. According to June rankings from the Sovereign Wealth Fund Institute in California, Norway’s wealth fund is the world’s second largest.

Since 1998, the oil fund has had an annualized, real return of 3.03 percent. The investor should take on more risk to help achieve its long-term target of a 4 percent return, the government-appointed Strategy Council, led by London Business School Professor Emeritus Elroy Dimson, said in November.

Abu Dhabi, Temasek

Other wealth funds such as Singapore’s Temasek Holdings Pte and Abu Dhabi are already investing in infrastructure and private equity to spread risk and boost returns. The Abu Dhabi fund, together with a group including Canada Pension Plan Investment, this month agreed to pay $3.2 billion for a 24 percent stake in Norway’s natural gas pipeline network.

The choice of adviser is likely to shape the oil fund’s investment decisions because “the permanent staff of the finance ministry is traditionally quite influential in setting operational rules,” Mork said.

While Gjedrem will be the ministry’s chief adviser for the fund, final decisions will be made at the political level by Finance Minister Sigbjoern Johnsen.

The ministry “is open to” the option of letting the oil fund expand into more asset classes, though “such new investments won’t be done now,” according to a transcript of comments by Johnsen to parliament, received by e-mail today.

‘Too Complicated’

Eriksen wants his successor to avoid “rapidly increasing the investment universe further,” he said in the June 8 interview. The fund should eschew “too complicated asset classes and not experiment too much,” he said.

Eriksen, who will become Norway’s ambassador to the Organization for Economic Cooperation and Development in Paris in September, warned that “with a big fund there are a lot of management challenges and the more complicated we make the fund the more complicated the management will be.”

Europe’s biggest equity investor, which got its first capital infusion in 1996, is mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate. The fund first moved into stocks in 1998, added emerging markets in 2000 and this year bought real estate to lift returns and safeguard the wealth of the world’s seventh-largest oil exporter. The fund invests outside Norway to avoid stoking inflation. It completed its first real-estate investment this year when it bought 25 percent in the U.K. Crown Estate’s Regent Street properties.

Strategy Criticized

“It’s much more complicated to invest in properties, in infrastructure than in equity and bonds, which you can buy every day on every market,” Eriksen said.

While the investor mostly buys securities by following global indexes, it has some leeway to stray from those benchmarks to boost returns. The strategy was criticized after active management of its bond holdings contributed to its record 633 billion-krone ($116 billion) loss three years ago, prompting the ministry to tighten guidelines.

Norway, a nation of 4.9 million people, generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s biggest energy company. Norway is also the world’s second-largest gas exporter.

To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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