N ICOLAI TANGEN brings an unusual set of skills to the task of leading the world's largest sovereign-wealth fund. In addition to a career in finance, the head of Norges Bank Investment Management (NBIM ), which oversees Norway's oil fund of $1.4trn, holds degrees in art history, economics and social psychology. Mr Tangen's public profile and his musings on leadership, decision-making and cross-disciplinary learning have been admired by many Norwegians in his first year on the job. But the task of running Norway's gargantuan piggy-bank is likely to become only more difficult in coming years.
A fraught appointment process first thrust Mr Tangen into the limelight. The controversy centred on his potential conflicts of interest with AKO Capital, the $20bn hedge fund he founded. After months of heated public debate he transferred his stake in the firm to charity before taking the helm at NBIM .
Having paid a hefty price for his job, Mr Tangen is determined to make his mark on the fund. Early in his tenure he announced three priorities: communication, talent development and returns. Mr Tangen communicates far more often with the public and the media than his predecessors, in an effort to make the workings of the fund more transparent. In January NBIM began publishing how it would vote at annual shareholder meetings five days ahead of the proceedings. Meanwhile, the publicity generated by his appointment has resulted in a surge in job applications to the fund, says Mr Tangen. He has also hired a sports psychologist in order to bolster his employees' emotional resilience to the ups and downs of markets.
It is the performance of the fund, however, that matters most. NBIM is given an investment mandate and an equities-bonds split by the ministry of finance. Over time the allocation towards stocks has risen to around 70% today (see chart). In return, income streams from the oil fund finance about a quarter of Norway's annual budget. Performance has held up so far: the fund posted an annual return of 9.4% in the first half of this year (though in the third quarter it gained only 0.1% compared with the previous three months). Since it was established in 1996 the investment pot has delivered, on average, 0.25% of excess returns a year over a benchmark index of global equities and bonds.
Mr Tangen has wriggle room within the confines of his mandate. The sheer size of the fund means that even small tweaks can make a big difference to returns, in cash terms. For a long time the investment pot was run much like an index fund owning, on average, 1.4% of every listed company in the world. But in April Mr Tangen announced a greater emphasis on a more active strategy called "negative selection", which involves selling stakes in companies that look especially risky. He wants to strengthen the fund's forensic-accounting team to root out fraud. (Even before Mr Tangen took over, the fund had cannily reduced its exposure to Wirecard, a German payments firm that imploded after a hole in its finances was exposed.)
Mr Tangen, who says he plans his life in discrete chunks like a Communist apparatchik, expects to stay in his job for five years. The rest of his tenure is likely to hold several challenges. The biggest worry by far is inflation, which could hit the value of both the fixed-income and the equities portions of the fund's portfolio. A period of low real returns looms, especially as politicians have little appetite for the fund to invest in opaque private assets, which may fare better in inflationary times.
Lower returns as well as a more active approach could complicate the communications challenge. Espen Henriksen of the Norwegian Business School in Oslo worries that frequent hobnobbing with the public distracts Mr Tangen from "deep, principled thinking about asset management". NBIM was such a political and financial success, Mr Henriksen reckons, because it oversaw a de facto index fund for so long. A more active strategy could leave the sovereign-wealth fund more open to criticism.
Another concern is political interference, says Karin Thorburn of the Norwegian School of Economics. Politicians have previously been content to leave the fund to get on with making money. But Norway's centre-left government, which came to power in September, seems to take a different view. In his first interview since the election Jonas Gahr Store, the prime minister, said that the fund was "political", as it belonged to the Norwegian people and its mandate was set by parliament.
The ruling party has made clear its intention to encourage NBIM to do more to reduce its portfolio companies' greenhouse-gas emissions. This happily dovetails with Mr Tangen's desire to be a responsible investor and, he says, need not jeopardise the fund's returns. The danger, however, is that political influence does not stop there, and that it begins to hurt performance. Those lessons in psychological resilience could well prove handy in the years to come. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Point of low returns?”
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