What to do with $550bn? Just keep investing

Abu Dhabi Model Economies: Trond Grande, the deputy chief executive of Norway's sovereign wealth fund, talks investment strategy for the $550 billion fund.

Trond Grande is the deputy chief executive of Norges Bank Investment Management, Norway's sovereign wealth fund. Vegard Giskehaug for The National

Trond Grande is just 40, although he looks younger, and is the deputy chief executive of Norges Bank Investment Management, the formal name for Norway's sovereign wealth fund.

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Once the oil started gushing on Christmas Eve 1969, the money started rolling in. Rather than just handing out cigars and Cadillacs to the population, subsequent governments decided to put in place a pension fund that would save the country's oil wealth for future generations. Mr Grande is one of those charged with making the money work.

The fund invests all revenues from petroleum-related activities and reinvests all the dividends. It is now worth US$550 billion (Dh2.02 trillion), close to one year's GDP and projected to grow to $1tn over the next 10 years. The fund owns 1 per cent of the world's listed companies, and has offices in London, New York, Singapore and Shanghai.

The National caught up with Mr Grande in his offices in the country's central bank, in a quiet but pleasant part of Oslo.

Tell us about the history of your institution.

You could say it all began for Norway when Phillips Petroleum found oil on Christmas Eve 1969; they had been drilling without success since the mid-1960s. The [border] line was drawn and much of the oil ended up on the Norwegian side. Throughout 1970s and 1980s most of the revenue was reinvested in the oil business. By the mid-1980s we realised the revenues might outweigh the investments and we might have net positive cash flow from these activities and it might even be so substantial we should try to set something aside, the idea being that these are fields that have been there for millions and millions of years and even though we are the generation that struck oil we shouldn't be the only ones to benefit. This idea for future generations came up, but also to save the economy from the classic "Dutch disease" of overheating. In 1991 the government passed a law to create a pension fund and in 1996 the first money came into the fund, 2bn a Norwegian krone (Dh1.36bn). The question was: where do you put this money? There wasn't an investment strategy; they just put it in foreign government bonds and that expertise was in the central bank, which partly explains why we are here. Decision was taken to invest outside Norway and Norwegian currencies. In 1998 decision was taken to go into equities. A gradual expansion took place in small and medium-size companies, emerging markets, corporate bonds etc.

Where in emerging markets?

We lean on the same classification as the FTSE. Not in frontier or African markets, but in developed and emerging markets, 47 different countries.

What happened next?

In 2004 we moved to being a responsible investor - our goals are purely financial long term, but we take our investments on the premise that companies that are responsive to certain issues such as climate change and water management, we single them out as focus areas. When we invest we have a series of principles.

Did you have to sell any holdings?

Tobacco excluded, also certain weapon-producing companies. .

And you kept buying equities?

By 2007 a decision was taken to increase equities from 40 to 60 per cent. As markets were falling, we were buying. About two thirds of equities we hold were bought during the crisis.

You've just moved into property?

Yes, we are now allowed to invest 5 per cent in real estate. We now have 60 per cent in equities, 35 per cent in bonds and 5 per cent in real estate. It's our first venture into non-listed or private investment space. Everything else is public in well-regulated markets and exchange traded. We follow benchmarks decided by the finance ministry.

Do you set yourself a limit in each company?

Yes, there's a limit of 10 per cent. That limit is set to make sure that we are perceived as a financial investor and are not pursuing political or national strategic goals in any way. Having 10 per cent of a company in most times makes you a large shareholder, and that goes back to our role of being a responsible shareholder. We are a major shareholder - top 10, top 20 - in most of the major companies around the world, particularly in Europe, where we are overweight in investments.

What return are you aiming to get?

A real return of 4 per cent. At the moment we are making 3 per cent, substantially below target, although we should make that this year.

That seems low. It wouldn't be much of a target for a hedge fund?

No, but we are not leveraged in any way. So far our investments have been based on publicly listed transparent instruments. The question is: is that playing to the strengths of the fund?. The real-estate venture is our first move into an area away from this. Our role is also to give advice to the finance ministry as to how to manage the fund. We write to them and they reply to us, generally in the form of a white paper. Public markets are good because they are deep and liquid, but even there we have to be careful how we move because it is easy to affect the market. So we are going in slowly to buy real-estate assets, we have $50bn to invest.

What about geographical allocation?

Overweight in Europeans and underweight in US. The reason for that is that at some point in the future these funds will be used to import goods, mainly from Europe. We want to preserve the funds in the currency we will need in the next 50 years. There is an ongoing debate as to whether this makes sense, should we have more exposure to growth regions, particularly Asia. We wrote a letter to that effect this spring to the finance ministry. Will we sell European holdings? Probably not, but we may be using future revenue to reallocate our holdings.

You are famous for your transparency. What's the benefit?

Benefit creates legitimacy of the fund for the Norwegian people. It's a one-way street, once you say what you're doing, it's hard to backtrack. Are we too transparent? I don't think so but we are getting close. We are balancing that.

What happened during the financial crisis?

2007 was a zero year. 2008 fund returned minus 23.4 per cent. That was a big loss. This caused a lot of debate. We were selling bonds to buy more equities, because that was part of our new strategy.

Was there a moment when you thought what the hell are you doing?

Yes. I wouldn't say it was calm. There was a lot of debate, culminated in March '09, that was the bottom. March 11 annual report was released, lots of debate. There was a lot of criticism and suggestion that we sell equities and at least stop buying more. Having been through that stress test we are much stronger now. Because we are a long-term investor we can withstand short-term fluctuations. It could have been the end of the world, all the companies could have gone bust, but it wasn't likely that would happen.

What was your background?

I spent 13, 14 years at a local Norwegian institution as a risk manager.

And what made you join NBIM?

It's a unique institution and was a unique opportunity, so I took it. The first couple of years were a steep learning curve.