Knut Kjaer, founding chief executive officer of Norges Bank Investment Management and the first manager of the Government Pension Fund of Norway, now the world’s largest sovereign wealth fund, has published a study that institutional investors should pay close attention to.
As part of a course he teaches, he compares asset allocations and performance of the Norwegian oil fund to two of its leading peers - Singapore’s GIC and Canada Pension Plan Investment Board (CPP Investments). All three funds are regularly cited as models in effective asset management.
And how different they are. According to Kjaer’s figures, GIC allocates broadly with some 34% in nominal bonds and cash, 30% in equities, 17% in private equity, 13% in index-linked bonds, and 6% in real estate. Its ten-year net return is 5.1%.
CPP Investments allocates some 24% to equities, 33% to private equity, 13% to credit, 12% to fixed income, and 9% each to real estate and infrastructure, achieving a ten-year net return of 10.8%.
Norway’s oil fund, meanwhile, allocates 69.8% to public equities, 27.5% to fixed income and cash, and 2.7% to unlisted real estate, with a ten-year return of 6.7%.
At first, it looks like institutions with heavy allocations to alternatives, especially private equity, perform best; Kjaer himself has previously advocated opening the Norwegian wealth fund to private assets. But is it so?
For one thing, Kjaer points out that CPP Investments’ strategy is “extremely more costly to operate” with a running cost of 78.8 basis points compared with just 4.4 basis points for the Norwegian fund, and that “reporting on performance lacks basic transparency”.
He also says CPP Investments runs at a rather higher risk than its peers, notes that the Canadian fund is only 25 years old, and that it remains to be seen how its private equity-heavy portfolio will perform if it runs into years of market turbulence, higher rates, liquidity constraints, a continued depressed market for initial public offerings, and lacklustre equity returns. After cheap money throughout much of its history, this is pretty much the market we are seeing now.
Kjaer also observes that GIC and CPP Investments both have very high headcounts. The US$1.6 trillion Norwegian fund has some 500 employees versus just under 2,000 for the $800 billion GIC and just over 2,000 for the $400 billion CPP Investments.
So perhaps the comparisons suggest a different conclusion. If you’re an institution that wants to achieve the kind of returns seen with an alternatives-heavy portfolio, especially private equity, you need to staff up with a very high headcount and prepare for very expensive running costs.