World's Biggest Wealth Fund Refines Risk Method Amid Expansion

The world’s biggest sovereign wealth fund is shaping its own analysis of risk factors as it looks for ways to boost returns and increase its global reach.

Because of its size -- currently $860 billion -- Norway’s wealth fund can’t rely on analysis and research that others have come up with, according to Ole Christian Bech-Moen, its chief investment officer for allocation strategies.

“It’s not easy for us to take an off-the-shelf factor strategy and implement it due to the sheer size of the fund,” he said in an interview on Wednesday after speaking at a conference in Oslo. “We operate in many different markets and trading costs vary a lot in the different markets, so we need to think thoroughly how to implement these strategies.”

Institutional investors, including Pacific Investment Management Co., have used a factor risk-approach that seeks to take advantage of specific risks and attributes such as market value, momentum, volatility or leverage when building a portfolio. Other major Nordic funds are also planning to implement a similar approach. Denmark’s biggest pension fund, ATP, said this week it’s seeking board approval to move to factor-based investing.

The Norwegian wealth fund is also looking at adding more risk, with those overseeing the investor now considering allowing it to boost its stock allocation beyond the current 60 percent. The fund also wants to add more real estate investments and buy infrastructure projects. It has been struggling to meet a 4 percent real return target amid record-low interest rates and volatile markets, and posted a $32 billion loss last quarter, its biggest in four years.

With investments spread across 75 countries -- a figure that is growing -- the fund faces particular challenges in factor investing in smaller, less liquid markets, Bech-Moen said.

“Some of these strategies use more data than just the market prices so the data quality and access to data in different markets may also be of concern,” he said.

It also faces challenges of cash-flow as the government will next year make its first ever withdrawal to cushion the nation from the slump in oil, which has been the lifeblood of the fossil-fuel-reliant economy. The fund has grown more than six-fold during an oil-price boom over the past decade.

While a decline in flows into the fund so far hasn’t impacted its strategy, it will make it more cumbersome to shift course in the years ahead, according to Bech-Moen.

“If you have no inflow and you want to change the portfolio composition, you have to sell something before you buy something,” he said. “So changes may take a little bit longer to implement.”

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