For those of you who want to learn more about the Norwegian oil fund, formally named Norway’s Government Pension Fund Global, perhaps the paper “The Norway Model” by Dimson et. al. (2011) could be of interest.
The paper discusses the oil fund and compares its investment mandates, dubbed the Norway model, with that of Swensen’s Yale model. While the Yale model focuses on alternative investments such as private equity, infrastructure and real estate the Norway model instead focuses on a widely diversified portfolio of traded fixed income and public equity. If you like, the Norway model tries to harvest beta while the Yale model tries to generate alpha.
The Norwegian oil fund is the largest sovereign wealth fund in the world with more than $600billion in assets. As a rule of thumb the fund owns roughly 1% in each publicly traded firm in the world. The fund is supposed to spread the oil-fortunes accumulated over a million years across several generations and it makes every Norwegian close to a millionaire (in NOK).
Now, I like the Norway model. However, there are two things I think I would change if I were in charge of the fund:
1) The real return expectations! Currently, the Norwegians expect the fund to generate 4% return in real terms every year. To me, this sounds a bit optimistic and it seems dangerous to build the state budget around these numbers (in the long run, they plan to spend roughly the real return each year). Particularly since the mean real return over the last 15 years is only 3% and the standard deviation is close to 8%....
2) The “war” risk! I would allocate a significant share of the fund to concentrated investments that will keep generate cash flows also if total Armageddon strikes. If the financial system suffers a complete meltdown, perhaps caused by a global war or something similar, it would be good to rely on other things than pieces of paper giving you the right to 1% of a firm in Asia or Latin America... I would allocate 5-10% to gold. I would buy protectable land and real estate that can be guarded. I would buy entire firms at home and in neighboring countries. I would also build up close relationships and make concentrated investments in certain countries in Africa and the like (like China).
In other words, a mix of Yale and Norway coupled with gold and disaster insurance would do it for me. Yaleway!