The Norwegian investment fund industry is on track to post more inflows from institutional investors than ever before. After the crisis in 2008 led to outflows of nearly NOK13bn (€1.6bn), investors have now regained confidence and in the first 3 quarters of 2010 invested more than NOK48.5bn (€6.1bn) (see top graph).
Confidence in equity markets continues and is noticeable in the shift of assets away from safe money market funds to higher returning equity funds. In September alone the net inflows accumulated to NOK1.8bn (€226m) (see graph 2).
At the start of 2010, they were putting money in emerging market government debt. That is now moving more towards equities and even emerging market investment grade corporate debt.
Another trend is that there is a noticeable increase in the usage of specialised investment consultants. Their effect tends to be an increase in focus on risk profiling and return targeting.
News Roundup
• According to the Legatum Prosperity Index 2010, Norway is the world’s most prosperous country, up from last year’s fifth place. Denmark is ranked second, while Finland is in third place.
• The Central Bank of Norway (Norges Bank), has appointed former MD of Statistics Norway, Øystein Olsen (58) as new Governor replacing Svein Gjedrem who has served two periods.
• The Norwegian government pension fund’s global portfolio, set up to safeguard the country’s oil wealth for future generations, in October rose to 3 trillion krona for the first time in its 14-year history. Since 1998 the fund has been allowed to invest up to 40% of its portfolio in the international stock market.
• The global portfolio, mentioned in the previous bullet point, has been ranked as the highest quality in terms of governance and transparency, topping a list of 53 sovereign wealth funds (SWFs) in 37 countries compiled by researcher Edwin M. Truman.
Hot Topics
What everyone is talking about
• Open architecture
The search for freedom of choice
• Active managers vs passives
Is hunting alpha a waste of time?
• Hedge Funds
What does UCITs III offer?
• Emerging Market equities
A rising tide?
Key points of the four biggest interviews
CIO, pension fund
• Solvency II will come, but so far there are no concerns
• 7% limit on allocations for Alternatives should be increased, new ideas are welcome
Head of fund research, leading player in pensions, banking and asset management
• Emerging market equities and corporate debt will attract more interest
• Infrastructure could be interesting (long term)
• Currency hedging strategies will be important
Researcher, investment consultant
• Expecting double dip, there will be no straight line
• Mix of equities and bonds will guide the way
Partner at an investment consultancy
• Norwegian krona makes investments in other currency more risky
• Liquidity will be an issue in the future
• Hedge Funds might come back; more transparency and regulation is needed
Investment strategies
Open architecture
Private banks are increasingly interested in offering open architecture solutions to their high net worth clients. However, there continues to be an important limiting factor for international fund managers: funds domiciled outside the EEA incur a 28% tax penalty.
Funds of funds
Institutional interest in the fund of funds market is small but growing. Previously there was very little call for this type of product but recent marketing of these products has had some success.
Strategic asset allocation
Despite the increasing role of investment consultants, the institutions are not letting go of their responsibility for asset allocation, forcing the consultants to work within a strict framework.
Asset classes
Alternatives
Historically the regulator imposed on institutional investors a maxi – mum allocation of 7% to alternatives, but there are rumours that this long-standing rule might be about to change. Alongside the developments in sophisticated Ucits products, Norway could see a general move away from traditional styles of investment.
However, investors are still cautious of these new products, questioning their transparency and the efficacy of their regulation.
Strategies
Currency hedging
Interviewees mentioned that currency has become a more important tool for investors.
The euro crisis at the beginning of the year and the ongoing fear of the US dollar weakening and sterling’s ongoing problems put a gloom over all the previous ‘safe’ currencies. As a result, investors are looking for new ways of hedging out currency risk to suit this troublesome time.
Rebalancing strategies
Following the financial crisis, investors sold off risk assets, even to the point where they breached their own usual minimums in an attempt to protect themselves.
Now they are looking to restore the balance by increasing risk assets again, but they are also looking at products that change their asset allocation automatically, such as life cycle funds.
Future Challenges
Risk Control
Considering the Solvency II developments and past events leading to the financial crisis in 2008, it will be of essence to review risk management and control and to be prepared accordingly.
Especially institutional investors have indicated they will monitor the risk component of their portfolios even more carefully in the future.
