Norway Sovereign Wealth Fund
Kennon-Green & Co. Global Asset Management, Wealth Management, Investment Advisory, and Value Investing

Indirectly, at least.  The Norwegian sovereign wealth fund, arising from the events set in motion in 1969 when the country struck oil in the North Sea, has managed to avoid using the wealth it generates from crude on temporary boosts in government spending, instead conservatively investing it for the good of the nation.  It’s grown so large, it now holds the equivalent of 5.11 trillion Krones for the benefit of the nearly 5.1 million folks who make up the population.  It holds 1% of all the stocks in the world, including right here in the United States.

It’s so well balanced, it looks like something straight of Benjamin Graham’s working papers – 63.6% in equities, 35.5% in fixed income, the remainder in real estate.  Run with an eye towards long-term, disciplined value investing, the fund has begun deploying incoming oil profits (it owns 67% of Statoil ASA, which distributes the oil dividends to owners regularly as the largest energy company in Norway and is publicly traded), dividends from existing stocks, and interest on bonds to asset classes outside of equities due to the high stock market valuations following the huge run-up in markets this year.

[mainbodyad]The managers say they are hoping to build up the real estate component to at least 5%, but that such a program would take much longer to implement due to the nature of the asset class.  I find it a very intelligent way to behave; avoiding liquidating existing good securities with strong economics by lowering their proportion through proactive redeployment of inflows.

The largest non-state controlled holding in the fund?  Shares of Nestlé SA.  Also topping the list is Royal Dutch Shell, BP, Exxon Mobil, Apple, Novartis, and others.  Whether eating chocolate, filling your gas tank, or buying a new phone, you’re shipping money off to the citizens of this rich Scandinavian kingdom.  

The new government is considering splitting the sovereign wealth fund into smaller portfolios, which could have ramifications for the global investment environment given how much influence this pool of capital can wield if it desires (it has offices in New York, London, Shanghai, and Singapore).  Sweden did the same thing, but quickly discovered the loss in economies of scale offset the perceived benefits of nimbleness.

Norway Sovereign Wealth Fund

The Norway sovereign wealth fund, known as the “Government Pension Fund – Global”, owns a 67% stake in publicly traded Statoil.  For decades, the fund has taken those dividends and redeployed them a conservatively managed portfolio of assets designed to serve as a permanent source of wealth for the Norwegian people.

It’s a wonderful story of responsible, conservative, stewardship.  Had the United States not put two wars on a credit card for the past 10+ years, we could have built a fund that staggered the rest of the world; that made college affordable; medical expenses reasonable.  Our political system has become so corrupt that if we tried something like this, Goldman Sachs would be getting an override on the profits, they’d be using obscenely leveraged derivatives, and our elected officials would overspend the principal until it was broke.  The whole thing would collapse, the bankers would walk away with their bonuses, and the poor would be harmed.  It would only work if there were a constitutional amendment modeled after the Switzerland debt brake and there were an absolutely strict, transparent, low-fee management structure in place.

To be perfectly fair, part of this is our size.  An individual state, with 5.1 million people, could pull it off much more easily than we could for various reasons.

The responsible conservatism of this culture is refreshing as evidenced by the most recent speech from State Secretary Paal Bjørnestad, “Even a rich nation can bleed dry – but we have not”.  It warns about the dangers of over-dependence upon the petroleum dividends as structural changes in government spending using them as a funding source could cause devastating cuts in future generations if the natural resources are exhausted.

If you’re in the mood for a case study, head over Norway’s Ministry of Finance and read the pension fund annual report.  You can also download the PDF report directly.