MAC: Mines and Communities

Behind The World's Biggest Pension Fund

Published by MAC on 2006-05-22
Source: The Guardian

Behind the world's biggest pension fund

As the oil revenue keeps gushing in, a civil servant is saving it for a rainy day

Patrick Collinson in Oslo, The Guardian

22nd May 2006

It is already the world's biggest pension fund with more than $230bn (£122bn) in assets. By the end of the decade it confidently expects to be $500bn in size, dwarfing any other investment fund on earth. And this huge stash of cash is run from a fourth-floor office in a nondescript building down an Oslo side street.

What is more, its manager, Knut Kjaer, a former academic, has quietly outperformed most professional fund managers on Wall Street and in the City who earn 10, or even 20 times, his £200,000-a-year salary. Mr Kjaer is a Norwegian civil servant. His job is to manage the country's petroleum revenues and, as Norway is the world's third largest oil exporter, the money is gushing in.

Unlike Britain, which squandered most of its North Sea oil windfall on 1980s unemployment giro cheques and an inflated exchange rate, Norway had the sense to ring-fence its petrodollars into a separate fund for the future. It also has a lot more oil than Britain, pumping 3.2m barrels a day from the North Sea, against 1.9m on the British side, and could have the same amount lying untapped under the Barents Sea.

Strict orders

This year Norway expects to plough a further $50bn into the pension fund - and that for a population of only 4.5 million. Put into perspective, the fund is soon expected to equal 100% of Norway's gross domestic product. If Britain had an equivalent fund, it would be worth close to £1 trillion - about enough to pay off every mortgage, credit card and personal loan in the country. Norway has the world's highest GDP per head - £35,800 in 2005 - so it can afford to put the cash aside for the long term.

But in another extraordinary decision - and one that remains deeply controversial in Norway - not one krone is allowed to be invested inside the country. Mr Kjaer is under strict orders from the ministry of finance to put all the money overseas, with a guideline of 40% in equities and 60% in bonds.

Public scrutiny of Mr Kjaer's activities is intense. Two years ago, the government imposed a council of ethics on the fund, over which Mr Kjaer has no influence. Its first move was to ban makers of landmines and cluster bombs, so Mr Kjaer was forced to sell holdings such as Lockheed Martin, EADS and General Dynamics. In December 2005, the ban was extended to any companies involved in the production of nuclear weapons. Out went Britain's BAE Systems. The fund has had to "disinvest" from 17 companies so far. Disinvesting, or the threat of it, appears to work. Already, he says, he has had some foreign ambassadors approach him asking what they can do to get their firms off the list or make sure they don't fall on to it.

Then there is the small matter of corporate governance. The same ethical guidelines require Mr Kjaer to "actively exercise its ownership rights". The fund owns 3,200 stocks - and last year that meant voting on 20,307 resolutions. Most are routine - the re-election of directors - but Mr Kjaer is at his most active in voting against excessive pay bonuses for company executives.


"In principle, we like linking performance and pay. But you will find us voting against the sort of deals where you see companies giving huge bonuses on historical performance. It must be real, linked to future performance and over a reasonable time horizon." He also votes against "any kind of poison pill" which halts shareholders' flexibility on takeovers and acquisitions.

So where does he invest the money? A surprising amount of it flows into British companies, despite BAE's exit: the fund's admirably transparent annual report reveals that in 2005 17.3% of the equity portion of the fund was in London-listed shares, compared to 7.4% in France, 5.4% in Germany and 3.2% in Italy.

Every single one of the fund's 3,200 holdings are listed in an appendix to the report. In Britain, his biggest holdings are a roll-call of the FTSE's giants: Shell, BP, RBS and Glaxo. In each case the fund owns about 0.5% of the company. More "active" positions include a 2% holding in Amvescap and oven maker Aga. It also owns 1% of Britvic, Baggeridge Brick, Business Post, Carillion, Detica, DTZ, Greggs, Hilton, Neteller, Premier Foods, Rank, Stanley Leisure and Sanctuary.

Interviewing Mr Kjaer is not like talking to other fund managers, who enthuse about their latest stock purchases and market themes. Their job is asset-gathering and promoting their services. Mr Kjaer's is guardianship of the nation's savings, and a gambler he is not.

He is not that comfortable about the "biggest fund in the world" tag, suggesting that perhaps Abu Dhabi is bigger. But as theirs is shrouded in secrecy, it is impossible to know. He is delighted that the average real rate of return on the fund since 1997 - taking in the worst bear market for 60 years - has been 4.5% a year after costs. Last year the fund earned 11%, one of its best returns on record, and comfortably beating his benchmark. Much of the $230bn is index-managed. The rest (20%) is actively managed, mostly by 100 sub-managers appointed by Mr Kjaer which, in London, include Gartmore, Schroders and Jupiter.

There are none of the gentlemanly three-year management contracts that the asset-management industry in London feeds off. Mr Kjaer sacks managers frequently; last year, 10% of the mandates were terminated. "It happens when key people leave. If they go over to a hedge fund, we will move our money the same day or the very next day. We don't want to be the last ones to leave."

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