World's Largest Sovereign Wealth Fund Should Follow Canada's Model

Columbia Business School Professor Says $850 Billion Norwegian Government Pension Fund Would Benefit From Taking on More Risk

May 28, 2014, 08:30 ET from Columbia Business School

NEW YORK, May 28, 2014 /PRNewswire/ -- A new in-depth review of the world's commonly accepted top sovereign wealth fund is being told to take a page out of the Canadian playbook. 

The study, commissioned by Norway's Ministry of Finance, "Review of the Active Management of the Norwegian Government Pension Fund Global," took a close look at the management of the fund since the 2007-2008 financial crisis and found that in order to realize greater returns, the fund should take more risk and adopt the opportunity cost management model pioneered by the Canadian Pension Plan Investment Board (CPPIB).

"The Fund has been run extremely efficiently; everyone involved in its management is conscientious about delivering high-quality investment management services at the lowest cost," says Andrew Ang, Ann F. Kaplan Professor of Business and Chair of the Finance and Economics Division at Columbia Business School. "However, we found that by reducing its exposure to risk since 2009, the Fund is likely missing out on opportunities to increase returns through a more balanced approach. The Canadian model would help improve that."

The Norwegian Fund, which manages the country's royalties from oil and gas reserves in the North Sea, is one of the world's largest pools of capital in the world. Its holdings are predominantly in publicly traded stock and bond markets, and the Fund only began to invest in real estate in 2011. The Sovereign Wealth Fund Institute considers the Norwegian fund to be the world's largest. 

The "Opportunity Cost Model" of active management was pioneered by the CPPIB (which manages over $180 billion) and is extensively used by the GIC Private Limited, formerly known as the Government Investment Corporation of Singapore. Under this model, all active decisions to deviate from benchmark are evaluated by the foregone opportunities to invest in low-cost, passive equity or bond portfolios. 

The authors find that active management has added value since the 2007-2008 financial crisis and calls the Fund's recent efforts in large-scale harvesting of "smart beta" or factor risk premiums an "excellent development… that capitalizes on the Fund's comparative advantages."

They also recommend that the Fund, already one of the most transparent investors in the world, could become even more so by adopting policies to further ensure broad public support and measure the value created at each stage of the investment process.  

The review was conducted by Professor Ang in collaboration with Michael Brandt, the Kalman J. Cohen Professor of Business Administration at Duke University's Fuqua School of Business, and David Denison, former president and CEO of the CPPIB. To fulfill its commitment to prudent long-term management, Norway conducts a mandatory independent review every four years. Professor Ang also participated in a previous report on the Norwegian fund in 2009. 

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SOURCE Columbia Business School