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The dangers of being cautious

Norway’s sovereign fund risks missing the boat by giving infrastructure a miss.

Supertankers are notoriously difficult to turn. And in the case of oil-rich Norway’s sovereign wealth fund, it seems to be getting harder every year.

Twelve months ago, after commissioning at least two reviews, creating two expert panels and considering the possibility of including unlisted infrastructure in the Government Pension Fund Global’s investment remit for two years, the Norwegian government rejected the option. It then reopened the debate in the run-up to the fund’s 2016 report – only to say ‘nei’ once again this April

It’s not for want of receiving advice to the contrary. Norway’s finance ministry, which decides how the world’s largest sovereign wealth fund deploys its $916 billion war chest, was told last December by McKinsey that the risks the government associates to infrastructure can be successfully mitigated in a number of ways. 

“To manage risk exposure, investors carefully select which infrastructure segments to invest in – and similarly which segments not to invest in – depending on their desired risk profile, capabilities and ability to mitigate relevant risks,” the consultancy said then. This seems common sense – and even harder to dispute in the case of infrastructure, where some segments are treasured for being able to generate stable, recurrent yield.

Such views were backed by Norges Bank, the manager of GPFG, a few weeks later: “The risk in unlisted infrastructure investments can be restricted by investing in assets in the energy, communications and transport sectors in developed markets in Europe and North America,” it noted in January. 

Both reports should have tampered the ministry’s aversion to the “high” political and regulatory uncertainty it sees associated with infrastructure, and which formed the core of its objections in April 2016. So what’s holding the fund back this time around? “A transparent and politically endorsed sovereign fund like ours is not well-suited to carry the particular risks posed by such investments, compared to other investors,” Minister of Finance Siv Jensen said two weeks ago.

It’s hard to be fully convinced by this explanation. While sovereign funds may have to be more cautious than others when making investments with political ramifications, that has not stopped a few of GPFG’s smaller cousins from getting exposed to infrastructure’s safest corners – think Australia’s Future Fund or New Zealand Super. 

Norway’s government seems especially worried about reputational risk. But here again, the Nordic nation sounds overly cautious. Historically, infrastructure assets, especially brownfield ones with a long-standing track record, have attracted very little controversy. In its report, McKinsey observed that instances of reputational damage borne by infrastructure investors were “highly unusual”. And it’s not as if listed equities, of which GPFG owns about 1 percent of the world’s total, are immune to such risks, especially in the oil and gas sector (Royal Dutch Shell is one of GPFG’s largest holdings).

Instead of being afraid to engage with the asset class, the fund could use its growing credentials as an activist, principle-driven investor to improve practices at the infrastructure businesses it backs. Besides, venturing into clean energy wouldn’t be out of sync with its target to have at least 1 percent of its portfolio invested into ‘green’ assets. Importantly, infrastructure investments could potentially help it generate better returns than the 5.7 percent annual performance it has generated since its 1998 inception, while at the same time deploying big chunks of its capital into long-dated, yielding assets.

GPFG’s restraint seems especially excessive after Japan’s $1.3 trillion Government Pension Fund – hardly deemed one of the world’s most adventurous institutions – launched its first-ever call for applications for infrastructure funds of funds last week. By comparison, the supertanker of the investment world runs a very real risk of missing the boat.

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