Institutional Investor's Alpha Magazine - November 2008 - (Page 25)

goals. Yes, the politicians come and go, but there has been fairly broad consensus on the investment strategy of the fund. Our job as civil servants is to provide them with a menu of risk and expected returns and to illustrate it. For instance, when we made the decision to increase the equity portion from 40 percent to 60 percent [in 2007], we did the analysis, and it showed that there was a 75 percent chance that we would make more money with 60 percent equity and a 25 percent chance that it was a bad decision. So we said, Here are the options: Increase the equity portion, 75 percent chance we’ll make money; 25 percent chance we’ll lose money. But I think it’s always difﬁcult for us to ﬁnd a good way to illustrate the consequences in a way that makes sense, and the only way we can do this is by gradually increasing the risk and seeing how it stands up through periods of turbulence before trying more change. Creating a sustainable investment strategy for a fund as big as ours takes time. We are not as nimble as a Yale or Harvard. Our decision-making process is longer, and our size makes it hard to rapidly build up signiﬁ cant allocations in less-liquid markets. So we have to turn our deliberateness into an advantage and trade in longterm horizons. Assuming you wanted to, how would you change the direction of such a big ship? But you’ve divested your holdings in more than two dozen companies. There are two categories. We screen companies based on what they produce, and the only products we exclude are some weapons — like nuclear weapons, cluster bombs, land mines and biological weapons. Of the 27 from which we’ve divested, 20 are in that category. The second category is based not on what they produce but on how they produce — for instance, those that cause environmental damage, rely on child labor or commit human-rights abuses. Why invest in such companies in the first place? These guidelines were set up after we began investing. In principle, when we go into new markets, we expand the benchmark for emerging markets, for small-cap companies. And then we try to screen these markets before we go in. What kind of thought goes into a decision like that? All major shifts in strategies have to be submitted to the Ministry. It also helps to have a consensus. We don’t just write a report. We sit down with the ﬁnance committee, which involves all the parties of the coalition, we give them the arguments, show them the slides and the numbers. It is a long process for us. So when we suggested an increase in the equity portion to 60 percent, the No. 1 priority was to demonstrate that the analysis we did pointed to a higher equity portion for the fund. That is the single most important decision in terms of the strategy of the fund. For us the natural process was to do the analysis of the equity portion and try to build a consensus on increasing it and to make people understand that we are making a conscious decision to increase risk and expected return. And the next logical step was real estate, so we made the decision to give priority to that. It’s just natural prioritizing. Is there a ceiling on how much you can control in a company or a fund? We have a council on ethics. They are independent from us. Their membership includes two law professors and one philosophy professor. If they come to us with a company they believe there are problems with — and if these problems are so severe that there’s a reason for exclusion — we will then go to the Central Bank and ask if they have a strategy that could help inﬂuence the company to change. Sometimes the Central Bank will say: “To be honest, this company won’t even pick up the phone. They don’t have a tradition of listening to their shareholders. “We have to turn our deliberateness into an advantage and trade in long-term horizons.” — MARTIN SKANCKE, GOVERNMENT PENSION FUND OF NORWAY It’s 10 percent of any one company or fund. Our average ownership share is about 1 percent. But even with a 1 percent share, you can be among the top ten shareholders in most companies. So you see yourself as activist investors? We are not active in the sense that we are strategic owners and care about corporate governance. And we are not passive in the sense that we’ll sit back and accept anything from management. It’s very difﬁcult to track what they are doing. It also isn’t in a sector where we have focus. It is also difﬁcult to get other investors involved.” So the possibility that we will change something in the company is pretty low, in which case we will probably say, “Divest.” If, on the other hand, the Central Bank says, “Well, yes, we believe that we can inﬂuence this company, and we can get other investors on board. It’s a sector where we have focus, where we have resources, and this is what we intend to do over the next months,” we will probably try that approach. I think it is important to see exclusion as a last resort, as the last in a chain of activities. The ﬁrst step is always to stay and try to change the behavior. But where we have tried and failed, we will divest. NOVEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 25

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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