Norwegian Govt Fund's 'Reprehensible' Fees?

Via Pension Pulse.

Daniel Brooksbank of Responsible Investor reports, Norwegian Govt Fund under fire over ‘reprehensible’ external managers’ performance fees:

The
Norwegian Finance Ministry has fended off criticism from the state
spending watchdog about controversial performance fees paid by the
country’s central bank to external fund managers that run assets for the
NOK3trn (€365bn) Government Pension Fund.

The Office of the
Auditor General recently issued a report to the Storting, the
parliament, that was highly critical of Norges Bank Investment
Management (NBIM), the arm of the central bank which runs the fund.

It
revealed that one manager – named in the Norwegian media as Malaysia’s
Pheim Asset Management – received fees of around NOK500m (€61m) for
running a mandate valued at NOK3.3bn (€402m) at the end of 2009.

“It
is considered reprehensible that Norges Bank entered into a contract
with an external manager without determining an upper limit for
performance-based remuneration,” the auditor said. Before the contract –
originally signed in 2008 – was renegotiated, the fee would have been
even larger, at NOK900m.

“This is so large, both in terms
of the amount and percentage, that the signed agreement must be deemed
to warrant criticism,” the auditor said. The comments come in a
detailed 274-page probe of all government spending.

Hilde Singsaas, State Secretary at the Finance Ministry, issued a statement
saying that when external managers earned high fees it meant the fund
had earned far more. The fees furore has been compounded by press
revelations in Norway that Pheim has been sanctioned for contravening market rigging provisions in Singapore. In September, Pheim and its CEO
Dr Tan Chong Koay were ordered to pay civil penalties totalling
SG$500,000 (€276,793), as well as legal costs to the Monetary Authority
of Singapore, by the Singapore High Court.

NBIM
charged the Govt Pension Fund NOK3.2bn in management costs in 2009 –
of which NOK1.8bn went to external managers. Of that figure, NOK1.4bn
was in performance-based fees.

The
Finance Ministry told the auditor that responsibility for external
managers lies with the central bank. But the auditor report questioned
whether the Ministry had fulfilled its oversight of the bank.

The
auditor also expressed concerns that the fund had continued to hold
bonds of companies – Rio Tinto, Barrick Gold and Textron – that had been
excluded from its investment universe for ethical reasons.

Singsaas
said the Ministry of Finance would consider calls to cap managers’
fees: “The basis for such an assessment must be what best protects both
the fund’s financial interests and its reputation.”

Any way
you slice it, that's a lot of fees being doled out by this giant fund.
Apart from the specific concerns cited by the Auditor General, I'm also
wondering if performance fees are being paid for what is essentially
beta. Remember, you can swap into the beta of almost any index at a
fraction of the cost, so why dole out huge external manager fees? To be
fair, this is what the Fund mostly does, managing the bulk of assets internally, just like AIMCo and PSP Investments.

The Government Pension Fund Global is very transparent and its mandate is unique. You can view the list of external managers on their website. I noticed a Montreal fund, Sectoral Asset Management,
a leading healthcare fund. In cases like Sectoral, it's worth paying
performance fees because they typically outperform their index by a wide
margin. I can't comment on the other funds because I do not know them
well enough.

Another thing you should bear in mind is unlike
pension funds, the Government Pension Fund Global only invests in liquid
equities and bonds (the fund received a mandate in March 2010 to invest
in real estate but it has not awarded any external real estate mandates
yet). This means it is exposed to market moves, or beta (note: the expected tracking error limit is 150 basis points, or 1.5 percentage points).

Finally, take the time to go over a speech by Governor Svein Gjedrem at the Norwegian Polytechnic Society on 2 November 2010, Perspectives on managing the Government Pension Fund Global. It is well worth reading to understand how this monster fund is being managed.

While
the Auditor General issued a critical report, it's also worth pointing
out many positive attributes of the way the Fund is being managed.
Norway's Government Pension Fund-Global is tops when it comes to transparency and accountability
among sovereign wealth funds, according to a recent ranking from the
Peterson Institute for International Economics. The Fund recently grew to NOK3trn ($512bn)
for the first time in its 14-year history. Keep an eye on this
Norwegian giant, they're already a global powerhouse and they're going
to be a force to be reckon with for many years to come.

Comments

[GoinFawr]

Respect, Leo.  (You get what you give).

SWF's are the 'austere way to heaven'  if you can keep them out of the tentacles of a certain malevolent giant squid.

 IE. If managed correctly they can substantially reduce the tax  burden on a society while still providing a high level of social programs, without deficits; if managed brilliantly a SWF could ultimately lead to complete tax freedom.  It is even conceivable that eventually Norway's SWF could achieve this goal precisely because of the reasons you have outlined above. JMHO

Enter all the right wing loonies with Ronald Reagan's broken record playing in their addled heads...

Best Regards