For its 25+ years of global investing and stewardship, for its position as one of the world’s largest and most influential universal asset owners, for its significant activity across asset classes and industries in 2023, and, more broadly, for its leadership among Sovereign Wealth Funds and contribution to the advancement of the industry, Global SWF believes that Norges Bank Investment Management (NBIM), on behalf of the Government Pension Fund Global (GPFG), is a worthy recipient of the 2023 Fund of the Year award. We were delighted to present it to Daniel Balthasar and Pedro Furtado Reis, the Co-CIOs of the US$ 1 trillion listed equities portfolio, and to speak with them about the fund’s recent evolution and ambitions.

[GSWF] In the past 25 years NBIM has tripled the money it has received, with a 6.0% return and 0.3% alpha p.a. What is the fund’s secret sauce, and what is the target return in the medium to long-term?

[NBIM] We are blessed with a number of conditions, including our very long-term horizon and low short-term liquidity needs, which allows us to pursue opportunities others may not be willing to; and our size with a very large portfolio but lean headcount and low operational costs, which allows us to be agile and innovative. We are an engaged owner with close contact with senior management and the Board of the companies we invest in, which allows us to create alpha over time. As per targets, we aim at reaching the highest possible return at the lowest cost and with an acceptable risk.

[GSWF] Some analysts believe that GPFG has grown “too much”, which may prevent it from moving more swiftly across asset classes. Do you think the fund should be split in smaller pockets or distribute dividends?

[NBIM] The mandate is set by the Ministry of Finance and specifies what asset classes we can invest in and what our benchmarks should be. All large decisions are anchored in Parliament. This ensures we are very aligned with the Norwegian citizenry and has worked very well for us.

[GSWF] NBIM was recently asked to give advice on whether Private Equity should be included as an asset class in its mandate. What do you think about this possibility, and do you think it will materialize soon?

[NBIM] We provided our response to the Ministry of Finance on November 28, and they will now come with a proposal through a white paper by April 2024. After that, it is up to the Parliament to decide. As we write in our letter to the Ministry of Finance, a mandate to include Private Equity in our portfolio would be a natural evolution for NBIM, and one that would allow us to capture opportunities that we are not able to now. There is a growing share of value creation that is not captured in public markets, and if we are a large, global investor in Equities that is not in that segment, we may be missing out. We believe that entering into PE would allow us to generate higher returns over time without detracting from our  transparency and responsibility efforts, as the PE industry itself has been moving in that direction over the years.

[GSWF] The two of you manage one of the world’s largest portfolios of equities, at circa US$ 1 trillion. How do you manage such large portfolio with such little headcount?

[NBIM] We are a very large asset owner, but with a very lean organization. Our investment strategies are grouped in three main categories: (i) market exposure; (ii) security selection; and (iii) fund allocation. We are responsible for the security selection, both equity and credit, and manage about 100 investment professionals. Our investment strategies operate under a delegated mandate structure, where portfolio managers are organized by (seven) sector groups and a number of cross-sector mandates. It’s a Portfolio Manager-centric model with the person with in-depth knowledge of companies is the one taking the investment decision. Our investment processes build on the fund's unique characteristics and competitive strengths. Central to these is our direct access to our portfolio companies. We train our teams to being able to maintain and nurture strong relationships with major companies in each industry. The team is fully accountable for their investment decisions, and that provides alignment with the fund’s mandate.

[GSWF] You are currently invested in equities of 63 countries. Can you describe your fundamental research and stock selection process? Does geopolitics play a role in your ability to invest in some countries?

[NBIM] In our area, we run fundamental security selection processes. In addition, we developed a proprietary investment decision support tool. This allows us to learn from mistakes, build on our strengths and over time improve the quality of our investment decisions. Our mandate states which countries we can invest in, and geopolitics is a risk, among many others, that our Portfolio Managers need to evaluate when taking investment decisions.

[GSWF] In the past 25 years, the weight of European equities has dropped from 52% to 30% to the benefit of American stocks. Is the regional split of your portfolio mirroring that of FTSE Global All Cap?

[NBIM] It does not have to mirror the benchmark, but it follows it closely. We keep the benchmark in sight but avoid mechanical replication of indices because of the high trading costs it would imply. In addition, the in-depth knowledge of industries and companies underpinning security selection will steer us, at the margin from one region to the other over time, depending on the relative attractiveness of the investment opportunities.

[GSWF] Similarly, we have seen Tech / Telecom and Healthcare grow on percentage basis in the past few years. Which industries do you believe present the best prospects in the current environment?

[NBIM] Technology and Healthcare have indeed been the most significant investment sectors this year because of the mainstreaming of artificial intelligence and the emergence of anti-obesity drugs. We state in our Strategy 25 that we will take sector risk when risk-reward is particularly attractive and use our specialist knowledge that identify trends that make us expect higher long-term returns in some sectors. This may feel contrarian at times, and we want Portfolio Managers to feel safe when taking risk, so we have brought in two external specialists in sports psychology and team performance to support the organization.

[GSWF] NBIM maintains a dynamic list of exclusions based on non-ethical behaviors. Is the fund trying to increase its engagement with investee companies? How is ESG integrated in Listed Equities?

[NBIM] Decisions on exclusions are taken by the Executive Board of Norges Bank after recommendations from the Council on Ethics, an independent body. Then we have the active risk-based divestments that we may decide to make if the companies’ activities are exposing us to unacceptable risks, but we usually engage with those entities before we divest in them. In terms of ESG integration, our lean team allows us to increase engagement and governance.  In addition, ESG considerations are fully integrated into our investment decisions. Our Portfolio Managers collaborate very closely with our Investment Stewardship teams. We are strong believers in engaging to change, and for that we need to stay invested, especially in major companies that pose material risks. An example of our work in ESG is climate risk, which is aligned with financial risk. We monitor progress and use voting actively to make our voices heard.

[GSWF] The employees working away from the Oslo headquarters represent almost 50% of the total now. Do overseas offices make economic sense, and where do you see NBIM opening a new post?

[NBIM] We do believe overseas offices make economic and business sense because we are a global and very large asset owner investing in all markets, across time zones. In that context, we are very comfortable with our exposure to international markets through our offices in New York, London and Singapore, and our real estate offices in Paris and Tokyo. There are no plans to open any additional office at the moment.

[GSWF] You both represent a rare case of non-Norwegians among NBIM’s Leader Group. What do you think has contributed to your rise in a foreign SWF, and what advice would you give to young professionals reading this piece and starting their careers in investment management?

[NBIM-PFR] We take pride in being part of an organization that promotes diversity in thinking and different perspectives to make better investment decisions. We are very global with over 600 people of 35 different nationalities, so it is just natural that the leader group has global representation, too. In terms of our journey, I have been at NBIM for 12 years and Daniel has been here 17 years, and we are able to work well together because we share the same principles and approach, and we enjoy managing investments but also people.

[NBIM-DB] From my perspective, we have been so long at NBIM because we do believe it is the best place to be in asset management. If you are passionate about fundamental bottom-up investment, there is no better organization to be at. Our advice to young people: try and find something you are passionate about, and go the extra mile and work hard at it. I also believe it is important to be somehow humble and patient, so do not expect to run an organization tomorrow!

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