Frank Thoughts: The Largest Portfolio/First Active Manager
Frank Boland
February 25, 2021

Imagine if you had just become the chief investment officer of the largest portfolio in the world. While there was no strong objection to your appointment, there was tremendous public skepticism. This recently occurred not at Fidelity Investments, Wellington Management, or BlackRock. None of them has a single portfolio close to the size of this this one. It is a sovereign wealth fund, but not from a country you would expect. It is not Saudi Arabia’s, Kuwait’s or any Middle Eastern nation. The fund is Norway’s and it is the largest sovereign wealth fund in the world; current market value 1.3 trillion!

Former Norwegian hedge fund manager, Nicolai Tangen, recently had this experience. The fund was created in 1995 as a generational pension account for Norway’s 5.4 million citizens. It was funded with the country’s growing oil wealth. Since inception, the investment approach had always been passive. It was “managed” as a balanced account (72% stocks and 28% bonds) holding over 9,000 stocks in 77 countries. However, newly appointed Nicolai Tangen believes active management is needed now … even required… for the future. Yet, European opposition to this idea has been strong.

Recently, the Financial Times published this encapsulated comment on its front page, “Nicolai Tangen’s appointment at the helm of Norway’s wealth fund has raised fears the former hedge manager will steer an activist route.” Such fear is the overwhelming gestalt of group thinking in today’s investment world. His appointment is quite contrary to the eight trillion mania for indexing currently embraced by the investment world. Since he has an estimated net worth of three quarters of a billion, it’s reasonable to suggest, he’s not into a government job to make money for himself.

In fact, he took a pay cut to $630,000 from his portfolio manager’s position with principal ownership of the 21 billion AKO hedge fund. Also consider, he gave $25,000,000 to his alma mater, Wharton School of Business. That’s 40 years of his new salary. It is my opinion Nicola Tangen has taken the job out a sense of service to his Norwegian heritage.  With just 5.4 million people, the country is smaller than New York City’s 8.7 million. It is also more homogeneous, as are many of the Scandinavian countries. Thus, there is a feeling of community and a sense of responsibility to it.

But is there more to this portfolio’s manager’s admonition for change and its popular opposition? There is if you believe timing or luck plays an important part of life. When the wealth fund was started in 1995 interest rates were in a secular decline (secular meaning duration of unknown time) which has lasted 25 years from the fund’s inception. That bull market is over. Interest rates are now close to 0%. It started in 1982 and lasted for two generations. Unless an investor is 60 or older, they have had no experience with a bear market in fixed income. Norway’s fund is currently 28% in fixed income.

Do you think an active manager could watch 28% of his portfolio go into what he knows could be a secular bear market?  We have experienced such a transitional scenario before. In 1965, Fed funds were 4.5%. Over the next 17 years Fed funds moved up to 20%! Large cap stocks went sideways. Small entrepreneurial companies such as Holiday Inns, Microsoft, Nike and Apple became the new leadership. As Ed Noonan, once said to me, “The crowd can be right for long periods of time, but what they often miss is the inflection point of change.” I believe Nicolai Tangen has correctly identified the inflection point of change for his country even though, he will make less money.

-Francis Patrick Boland

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