Is Norway’s Pension Fund Adequately Diversified? Part II

In an earlier blog I allowed myself some raw speculation as to whether holistic risk management thinking is being adequately applied when it comes to the Norwegian government’s management of the state pension fund. This fund represents one of the world’s largest exercises in risk analysis in “retirement planning.” The Fund invests the oil wealth generated in the country in a mix of global equities and % bonds, and whose performance is essentially currently measured against a global benchmark portfolio of bonds and equities.

I specifically asked the question as to whether the fund should be devoting far more significant efforts to invest in non-traditional assets, as a way to mitigate some potential scenarios that could adversely affect both equity and bond investments. Investments that could potentially mitigate some of these scenarios could perhaps include very large positions in alternative energy technologies, and I noted however that although the costs and risks of such an investment strategy could be large (particularly as the scenario which it mitigates may never materialize), it could nevertheless be a prudent one, given the already very large fund that already exists for a small population base of about 5m people. Could it be so bad if 5%-10% of that fund were invested in such technologies (with such investments arguably supporting some of the fund’s other goals – such as ethical or social investments)?

It is therefore with interest that the Financial Times reported last Saturday  that the Norwegian government is planning to review the operations of its sovereign wealth fund after it lost €75bn ($100bn, £68bn) on investments last year. I await eagerly the results of this review, specifically of course to see whether such fundamentally new investment strategies will be implemented.

Dr. Michael Rees
Director of Training and Consulting

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