Our previous article What Can be Learned from Norway – The Capitalist State explored how Norway efficiently channels income from its natural resources into financial markets. Now, let’s delve deeper into Norway’s comprehensive investment strategy, covering equity, fixed income, and real asset management. This article will primarily focus on Norway’s intriguing approach to equity investments.

Introduction

Norway’s sovereign wealth fund adopts a long-term perspective, positioning itself to capitalize on market fluctuations. This aligns with Norway’s multi-generational investment horizon, catering to both current and future generations.

The Ministry of Finance in Norway defines investable asset classes, establishes benchmark indices, and imposes constraints. The current benchmark index comprises 70% equities and 30% fixed income, with additional investments in assets like real estate. The overarching goal is to achieve the highest return after costs while managing acceptable risks.

Equity Investments

Most of Norway’s investments are directed towards equities, using market exposure or stock-picking strategies based on fundamental resources.

In the market exposure strategy, investments align with the benchmark index set by Norway’s Ministry of Finance. This involves nuanced strategies to reduce transaction costs and increase returns.

Conversely, the stock-picking strategy offers advantages due to the fund’s substantial size. It grants direct access to companies, fostering a profound understanding of industries. The fund’s long-term perspective and limited short-term liquidity enable strategic investments. The stock-picking strategy encompasses several sub-strategies:

• Sector Bets: Positions are taken in sectors expected to yield higher returns.
• Adjusting Exposure to Individual Companies: Exposure to specific companies is increased or reduced based on performance expectations.
• Risk Mitigation: Certain markets or companies are avoided to reduce risk and enhance earnings.
• Investing in Pre-IPO Companies: Strategic investments are made in companies before their initial public offerings.

Portfolio managers use an investment simulator to analyze decisions and enhance future choices. Psychological safety enables embracing contrarian perspectives and avoiding herd behavior. Norway’s substantial investments allow active participation in corporate actions, as evidenced by their comprehensive voting history in shareholder meetings (voting overview).

Fixed income                                                                                                            

The fixed-income strategy minimizes fund volatility, ensures liquidity, and leverages risk premiums in the bond market. Like equity strategies, fixed-income investments include market exposure and selecting bonds based on fundamental analysis. Investments primarily consist of government-issued bonds and bonds from related entities.

Real assets

To diversify, Norway’s fund invests in listed and unlisted real estate and unlisted infrastructure for renewable energy. The portfolio allocates 3% to 7% to real estate, focusing on wind and solar power assets. Plans include expanding investments into emerging markets and new technologies such as storage and transmission of renewable energy.

For detailed insights into Norway’s fund strategy, please check the website.

Conclusion

Norway’s sovereign wealth fund offers valuable lessons for individual investors. A simplified approach includes investing in large and mid-sized company stocks, a global bond index, and owning a home. By aligning their portfolios with Norway’s strategy, investors can adopt a successful investment approach.

Norway has a mixed economic system based on free-market activity but with significant government intervention, especially in the oil industry. Despite this socialist approach to running the economy, the Norwegian state follows a capitalist way of managing the income generated by its natural resources. A portion of this income is invested through a fund in the financial market. Currently, the fund is one of the largest in the world, with a value of around $1.4 trillion, equating to about $250,000 per Norwegian citizen.

This article aims to demonstrate how individuals can incorporate some of the ideas behind Norway’s approach into their financial management.

History

The fund’s history began in 1960 when Norway’s government, led by Prime Minister Einar Gerhardsen, took control of petroleum resource management. The following timeline presents some of the significant subsequent events.

Timeline:

• 1966 – Norway initiates the search for oil.
• 1969 – Norway discovers its first oil field in the North Sea (Ekofisk).
• 1971 – Oil extraction starts.
• 1974 to 1989 – Norway’s parliament studies how the country’s oil income should be used. In 1983, the idea of creating a fund where the government could temporarily store oil revenues and only spend the actual return from the fund was proposed.
• 1990 – The fund is created. It was designed for long-term investment in assets outside of Norway.
• 1996 – The fund receives its initial capital of 1,981,128,503 NOK, around $186 million at the current exchange rate (1 NOK = $0.0940).
• 1997 – The fund is wholly invested in government bonds. On this date, it was authorized to allocate 40 percent of its value to equities.
• 2000 – The fund begins to invest in a few emerging markets.
• 2002 – Corporate and securitized bonds are added to the list of investable assets.
• 2007 – Small-cap companies are included in the list of investable assets, and the limit to equity investments increases to 60 percent of the fund’s value.
• 2008 – Real estate entered the fund’s investment universe, with a maximum allocation of 5 percent of the total assets. The fund is also allowed to invest in all emerging markets.
• 2019 – The fund’s value reached 10,000 billion NOK ($939 billion), with approximately half of that value generated by the returns on the fund’s investments.
• 2021 – The fund makes the first investment in unlisted renewable energy infrastructure.
• 2023 – The fund’s annualized return is five percent, and its current value is approximately 15,000 billion NOK ($1.4 trillion).

What if everyone acted like the state of Norway?

John was born in 1970 and is now fifty-three years old. He will be retired in a few years. In 1997, when he was twenty-seven, John decided to apply the Norwegian approach to his savings after reading about the Norwegian fund. John faithfully saved a percentage of his salary and invested it in a few funds of stocks, bonds, and real estate funds.

Today, twenty-seven years after he began investing, John wants to assess the success of his past decision. After all, he put all his savings at risk, as investing involves inherent risk.

Over the past twenty-six years, John saved $3,000 each year, which is $78,000. His savings achieved an annualized return of five percent per year, totaling $83,007.38. Adding it all up, John’s savings are $161,007.38, more than half of this amount was generated by investment returns.

Initial Savings ($)	0
Accumulated savings ($)	78,000.00
Savings interest ($)	83,007.38
Total Savings ($)	161,007.38

John also wants to prepare for the future. After all, he has over twelve years of work before he retires. What could be the expected outcome if he continues on his current path?

Initial Savings ($)	0
Accumulated savings ($)	114,000.00
Savings interest ($)	225,285.07
Total Savings ($)	339,285.07

Well, let’s leave John to evaluate his past decisions and reflect on the next steps in his life.

Conclusion

Investing involves the risk of capital loss, but it also has the potential to bring great rewards. The examples of Norway and John show the possible outcomes of long-term investing. But the question remains: what if you acted like the state of Norway?