Don’t Make The Same Mistake As Norway
By Roger Nusbaum, AdvisorShares ETF Strategy
The Financial Times had a lengthy writeup on the Government Pension Fund of Norway and that it is considering increasing its equity allocation from 60% to 75% as it tries to grapple with oil prices that although are well off the bottom are still low. The declines and only partial recovery has created budget deficits that need to be managed and the withdrawal rate from the sovereign wealth fund and by extension the fund’s returns are of course relevant. ZeroHedge also weighs in with its usual gloom and more gloom.
I’ve written a lot of blog posts on endowments/sovereign wealth funds/pensions because I think there is a lot to learn in terms of what to do and also what not to do. Changing asset allocation after eight years of rising equity prices to own more equities is a probably shouldn’t do or at least is a risky proposition. It’s a perpetual fund (in terms of time horizon) so there was no life event that occurred, there is simply concern over funding, returns and withdrawals. Read the FT, there are also political factors.
While most people need the growth that goes with a normal allocation to equities (maybe 50-70% is normal?), what Norway is considering seems like a 60 year old, wanting to retire at 65, increasing their allocation from 60% to 75% in hopes of catching up. While that sort of maneuver can of course work, the consequences of being wrong, really wrong, like summer 2007 wrong, would be ruinous.
The reason to write about these large pools of capital, as covered many other times, is to study and learn from their asset allocation ideas (good and bad), I find it fascinating. Barron’s had a short article over the weekend titled The Case For Macro Funds which is another allocation curiosity. In this case the macro funds considered in the article were traditional mutual funds.
I think of macro funds as being thematic; long term themes like maybe infrastructure in India (could be decades and probably hasn’t really started yet) or betting one way or another on whether the new President will or won’t being able enact the policies he campaigned on.
The funds profiled seemed more like asset allocation funds meant to replicate a 60/40, give or take, although in the case of one of the funds, it had 43% in cash, the themes, if there were any, weren’t apparent except for 43% in cash collateralizing a large short position in bonds.
The three funds, if they are asset allocation funds then maybe they have an extra layer of thought…maybe, had five year annualized returns 6%, 3% and 3%. The numbers drew some groans in the comments for how far they’ve been behind the S&P 500. Regardless of whether these funds are great or terrible, comparing a multi asset fund to an equity index misses the point.
Above, I mentioned most people need the sort of growth that goes with a normal allocation to equities but plenty of people do not. There are some funds/strategies that target CPI + X% like CPI + 2% or whatever. If CPI is running at 2%, for discussion’s sake, then a portfolio looking for a 4% return can get away with a whole lot less in risk assets, like maybe 25% or 30% in equities which will generate half of the 4% in many years of the stock market cycle, especially if they can squeeze out a few more basis points in dividend yield above the S&P 500.
Investors willing and able to spend the time needed can obviously build this for themselves with exchange traded products. The recognition of whether or not something like this could be suitable and then the work to construct a portfolio that can deliver on that objective is for me a big reason to study things like the Norway pension.