Institutional Investor's Alpha Magazine - November 2008 - (Page 24)

Martin Skancke and 2002, ultimately losing tens of millions of dollars in public money. The Government Pension Fund has not gone unscathed by the global credit crisis. A third of its assets are in U.S. holdings, and the fund has acknowledged that its stake in the debt of Freddie Mac and Fannie Mae — worth $24 billion at the end of 2007 — has fallen steeply in value and was worth only about $18 billion at the end of June (the fund doesn’t release third-quarter numbers until the end of November). The fund has also said it had about 17.5 million shares in now-bankrupt Lehman Brothers Holdings. Overall, its returns have been positive in nine years, negative in only two and remarkably stable, with an average annual return of 6.29 percent since inception. chemical giant Monsanto Co. because that company had reduced its use of child labor in its cottonseed production in India. Alpha Contributing Writer Udayan Gupta met with Skancke at his Oslo ofﬁce in September to discuss shortterm trauma versus long-term conﬁdence. Alpha: Have recent events undermined your confidence in the markets or your ability to meet obligations? Skancke: No, because our time horizon is inﬁnite and “Norway’s experience with ethical guidelines provides further proof that commitment to the common good is not necessarily antagonistic to high returns.” — INTERNATIONAL MONETARY FUND REPORT we don’t need liquidity — we don’t have customers who withdraw their money if they become uneasy about the markets. So that is a very good and basic way of thinking, which has not been affected by events. With the formulation of a ﬁscal policy guideline that in effect says that we, over time, should spend only the real return on the fund, the investment horizon is — in principle — inﬁnitely long. Does that mark a significant evolution in your philosophy? We began as a local fund — although there were some global components — and we were unsure about the time horizon because we thought there was a real risk that we would have to liquidate after a few years. What changed your mind? The fund hasn’t gone unnoticed beyond Norway. A 2007 study of 33 sovereign wealth funds by the Washington, D.C.–based Peterson Institute for International Economics scored the Norwegian fund second behind New Zealand’s for structure, governance, accountability and transparency (Norway’s fund received 23 points out of a possible 25; the Dubai fund received half a point). The report praised the fund in “buying in markets whose values are falling to rebalance its portfolios” and said it was a case study in sustainability and stability. In a similar study the International Monetary Fund said, “Norway’s experience with ethical guidelines provides further proof that commitment to the common good is not necessarily antagonistic to high returns.” The IMF added that it will use the Norwegian fund as a model for the best-practices guidelines it is writing for sovereign wealth funds, which have come under broad ﬁre for their typically poor transparency and tendency to mingle ﬁnance and politics. In September the Government Fund announced it was selling its holdings in Rio Tinto, the multinational mining company, over allegations of pollution. “There are no indications that the company’s practices will be changed in the future or that measures will be taken to signiﬁcantly reduce the damage to nature and the environment,” the Ministry of Finance concluded. Almost simultaneously, the fund said it would continue to be a shareholder in 24 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008 In 1998 we increased the equity portion of the portfolio from zero to 40 percent. Then we lived through the dot-com bubble and lost a lot of money in 2002. There were no serious challenges to our investment strategy after that, so gradually we found the conﬁdence to suggest we take more risk. We have taken a very gradualist approach, and that’s because we are asking the Norwegian people for their trust in investing 20 percent of the GDP each year — so we have to be very serious about reputational risk. That means that going out immediately into highrisk market investments is probably not a very good idea. We want to make sure not only that we understand what we are doing but that the general public understands what we are doing every step of the way, There’s been a major backlash here in Norway against hedge funds, owing to the municipal losses associated with Citigroup–Terra Securities. Does that make hedge funds a hard sell? We have nothing against hedge funds because what is a hedge fund? Some of the strategies used in active management at banks are long-short strategies. So are the funds that are doing that equity funds or hedge funds? It’s just a matter of deﬁnition. Even though we don’t do private equity funds, what we are looking at is doing more in the pre-IPO, venture capital space of private equity. We’re also seriously looking at the leveraged-buyout type of funds. How do you decide where to put money? We feel that our job is to provide the politicians — they are the ultimate owners — with the data to establish the

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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