Monday, September 17, 2012

Big Money: Yale vs. Norway

From family office consultant Greycourt Capital, one of their quasiperiodic White Papers::
Every investor knows about Yale University and the extraordinary success of its endowment portfolio under the guidance of the redoubtable David Swensen. Indeed, many families have tried to emulate Yale’s approach to asset management, for obvious reasons. Yet, those families – and even most institutional investors who have tried to copy Yale – have failed. The reasons for these failures are many, but these are the main stumbling blocks: few investors have the huge asset base Yale boasts (about $20 billion); almost no one was as early into venture and buyouts investing as Yale; it’s a rare investor who can match the talent and dedication of Yale’s in-house investment staff or investment committee. But the main reason for the failures is far simpler: if you want Yale’s results, you need David Swensen to manage your assets.

By contrast, almost no one has heard of the Norway Government Pension Fund (NGPF). But here are a couple of facts about the NGPF.1 First, it’s now the largest sovereign wealth fund2 in the world - $580 billion at mid-2011. Compare this to the largest US pension fund, CalPERS, which has about $230 billion.3 Second, its investment track record is quite good, and Edwin Truman recently awarded the NGPF top position on his “scorecard,” ahead of 53 other sovereign wealth funds from 37 countries.4 Finally, and most important, it’s only a modest exaggeration to say that the NGPF is the “anti-Yale” in its investment approach.

We’re guessing that few of our readers have ever heard of the chief investment officer of this remarkable fund, the “David Swensen” of sovereign wealth funds. His name is Yngve Slyngstad, and he works for (are you sitting down?) a bank , specifically for the Norges Bank, Norway’s central bank based in Oslo.5 One important reason why no one has heard of Mr. Slyngstad is that Norway uses a “team model,” rather than the “star” model embodied by David Swensen. This suggests that to the extent the Norway Model may be of interest to family investors, it ought to be a lot easier to imitate than the Yale Model.

The “Yale Model”
When we think of the Yale Model, although it’s a bit of a caricature, we think of these characteristics:
A strong equity orientation, thinking of equity in its broadest sense. Only about 4% of the Yale portfolio is invested in bonds.

A very large willingness to trade liquidity for return. Including hedge, private equity, and real assets (natural resources and real estate), roughly 82% of Yale’s portfolio is illiquid. Compare this with Yale’s total of 16% in US and non-US long equities.

A firm belief in active management. Yale owns almost no index-like investments.

The “star” model of endowment management: virtually every important decision at the Yale Investments Office is made by David Swensen.
The “Norway Model”
Again, it may be slight exaggeration, but looking at the Norway Model what we see is that it’s “virtually the opposite of the Swensen model.” For example:
Norway relies almost exclusively on publicly-traded securities.

The proportion of active management in Norway’s portfolio is de minimus , because the fund is constrained by a very small tracking error policy.

Norway owns no private equity, and little hedge.

While Yale owns almost no fixed income, Norway’s strategic benchmark includes a 40% weighting to bonds.

Until 2008, Norway owned no real estate.

Norway follows a rigorous socially responsible investment policy that eliminates many securities from its investable universe (and therefore, according to Modern Portfolio Theory, Norway’s returns should be constrained).

As noted, Norway follows a team approach in which the staff operates by consensus and the investments are closely supervised by an Advisory Council, a Strategy Council, and even a Council of Ethics.
Similarities to Family Investors
There are characteristics of the Norway Government Pension Fund that would seem to make it simpatico with family investors:

Remarkable wealth. We’ll start with the proposition that Norway is to other countries what
wealthy families are to other families – in other words, Norway is a very rich place. Even before oil was discovered in the 1960s, Norway was an affluent society, but today it is often ranked as the wealthiest country in the world on a per capita basis.
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