Opportunity cost of equity holdings, exclusion policy identified by NBIM

Jonathan Boyd
Opportunity cost of equity holdings, exclusion policy identified by NBIM

The opportunity cost defined as the impact on returns of increasing the equity exposure over time of the giant Norwegian sovereign wealth fund – the Pension Fund Global – as well as the cost of pursuing hard exclusions of holdings based on ethical considerations has been laid bare in a series of data slides put forward by Norges Bank Investment Management at the annual investor conference hosted recently by the Norwegian Fund and Asset Management Association (VFF) in Oslo.

According to the data, the decision to increase the equity exposure of the fund from 40% in 1988 t0 60% by 2007, has resulted in a clearly visible hit to returns over the past decade, as equity markets stumbled in the wake of the global financial crisis. As the chart below shows, the performance of the portfolio with a 60% equity exposure has only recently caught up with the performance of the portfolio should it have continued to hold a lower, 40%, exposure since the change in 2007.


The so-called oil fund is also known for its hardline approach to exclusion. This matters because of the size of the fund and its scope as an investor – it owns literally thousands of securities globally. The fund’s approach to exclusion on ethical grounds stems from the fact that the management of the fund ultimately is answerable to Norway’s Parliament, which enacted the legislation creating the fund in the first instance to manage the significant income to the state from the country’s oil and gas sector – which has helped the country become one of the world’s richest on a per capita basis.

According to the data presented at the VFF conference, the exclusion decisions have come at a cost, which has been quantified. As visible in the charts below, the precise impact of exclusion depends on factors such as which sector is impacted and also for what reason the exclusion is done, such as whether it is based on the products that a company produces, such as weapons or tobacco, or whether it is based on the actions of the companies excluded, where reasons include serious breaches of human rights, individuals’ rights being impinged by war or conflict, serious environmental damage and serious corruption.

As indicated by the second chart below, the accumulative impact of exclusions over the past decade on returns from the portfolio are calculated at just over 1%.

Also of note in the data presented is the extreme cost-conciousness of NBIM when it comes to management fees, especially given that this is an actively managed portfolio. This has been noted, anecdotally, over time by third party fund providers who have approached NBIM with their products or solutions; because of the size of the portfolio it is generally held that NBIM will strike a hard bargain over any fees paid to third parties. In recent years, the manager has also been building up its own internal capabilities.

As the chart below shows, management costs are kept extremely low – also reflecting the fact that as a manager of a fund with one client – the Norwegian state – it is not in a position to support the sorts of incomes that so-called star fund managers running actively managed portfolios might be accustomed to in other markets. The annual fees have effectively been cut in half over the past two decades, from an average of 0.09%, to 0.08% in the past 10 years, to 0.06% in the past 5 years, and then 0.05% in 2016.

The full presentation from NBIM is available here (in Norwegian): NBIM_presentation_oil_fund_performance