Buttonwood

The departing boss of Norway’s oil fund on building an asset manager

Norges Bank Investment Management is the world’s single largest owner of equities




There is a point in a conversation with Yngve Slyngstad when he invokes Bjorn Borg, the Nordic tennis star of the 1970s. The Borg approach—make sure you don’t lose; above all, be solid—is one Mr Slyngstad has instilled in Norges Bank Investment Management (NBIM), the organisation he has run since 2008 from within Norway’s central bank.

Its target, to beat a benchmark by 0.25 percentage points a year, is modest.

But meeting it has led to immodest wealth.

Mr Slyngstad is to step down later this year when Nicolai Tangen, a London-based hedge-fund manager, takes his place in Oslo. The departing boss resigned in October, 50 years to the day after Norway first struck oil.

The same day Norway’s oil fund passed Nkr10trn ($900bn) in value. It is the world’s largest single owner of equities. On average it owns 1.5% of every listed firm globally.


This seemed improbable when Mr Slyngstad joined in 1998. The price of oil was falling towards $10 a barrel. The idea of an oil-reserve fund seemed risible. Yet Mr Slyngstad left a well-paid job in the private sector.

What attracted him was autonomy. He and his senior colleagues used it to build a fund manager based on sound principles.

Discipline, solidity, minimising errors—these Borg-like tenets are difficult to follow when managing a portfolio. But they are key to investing success.

Norway’s oil fund was set up in 1996. Its founding stemmed from an awareness that oil-producing countries run into trouble. One trap is the “resource curse”, the corruption that mineral wealth often fosters. Another is “Dutch disease”—currency appreciation that then retards the progress of other export industries.

The fund is primarily a means to smooth the effect of volatile oil revenues on the government’s budget. All oil revenue is paid into it. It then makes a steady contribution to the budget.

A decade-long oil boom created a windfall.

The fund came to be seen in a new light, as an endowment for future generations. At its peak last year, it was worth around three times Norway’s annual GDP.

Its wealth is also the fruit of judicious investment. Mr Slyngstad was brought in to build the fund’s equities arm; until then all the money had been in bonds. In principle, a long-horizon investor should tilt towards riskier shares.

But even the best principles can be hard to follow. This became clear soon after Mr Slyngstad was made boss.

The fund had raised the equity share of its portfolio from 40% towards 60% during 2008.

The timing looked bad. The stockmarket crashed in the autumn.

A rally in the fund’s bond holdings limited the damage. Still, the fund lost 23%.

There was then a tough decision to make. The principles of the fund called for rebalancing: selling bonds that had gone up in value to buy shares that had become cheaper, thus reaching the 60% equity weight.

It takes stomach to buy assets that others are fleeing from. Some funds suspended their rebalancing rules.

Was there hesitation?

“Yes, of course,” says Mr Slyngstad. It was a big political risk. If the stockmarket did not revive, there would be a reckoning. Even so, the finance ministry gave its blessing.

“We ended up buying $175bn of equities, 0.5% of the market, during a huge crisis.”

This set the fund up nicely for the ten-year bull market that followed.

Rebalancing is now hard-wired into its processes.

There are times, such as now, when shares have again fallen a long way and it is easy to lose your nerve. It is usually the worst time to do so.

The fund’s long-term focus means it can be bold during crises. But there are also constraints that do not apply to other investors. The need for transparency rules out dabbling in private-equity funds. nbim has been a pioneer in socially responsible investment.

This might look like Nordic do-goodery and a sop to posturing politicians. But the approach is hard-headed. A lot of decisions to exclude stocks are taken with an eye to long-term returns.

Coal shares, for instance, are out because the business does not appear to have a lasting future.

Companies in emerging markets that do not pass muster on corporate governance are avoided.

In general this has been a way to improve returns.

The tennis analogy is: stay on your baseline; eliminate basic errors; be solid first—and only then, be smart. You will win in the long term.

A lot of fund managers see a risk to their careers in looking too far into the future. They may lose clients in the meantime.

Things are different at Norway’s oil fund.

“The career risk”, says Mr Slyngstad, “is not to implement the strategy.”

The Coronavirus Pandemic Will Forever Alter the World Order

The U.S. must protect its citizens from disease while starting the urgent work of planning for a new epoch.

By Henry A. Kissinger


The USNS Comfort hospital ship travels under the Verrazzano-Narrows Bridge in New York, March 30. Photo: Dimitrios Kambouris/Getty Images .


The surreal atmosphere of the Covid-19 pandemic calls to mind how I felt as a young man in the 84th Infantry Division during the Battle of the Bulge. Now, as in late 1944, there is a sense of inchoate danger, aimed not at any particular person, but striking randomly and with devastation. But there is an important difference between that faraway time and ours. American endurance then was fortified by an ultimate national purpose. 

Now, in a divided country, efficient and farsighted government is necessary to overcome obstacles unprecedented in magnitude and global scope. Sustaining the public trust is crucial to social solidarity, to the relation of societies with each other, and to international peace and stability.

Nations cohere and flourish on the belief that their institutions can foresee calamity, arrest its impact and restore stability. When the Covid-19 pandemic is over, many countries’ institutions will be perceived as having failed. Whether this judgment is objectively fair is irrelevant. The reality is the world will never be the same after the coronavirus. To argue now about the past only makes it harder to do what has to be done.

The coronavirus has struck with unprecedented scale and ferocity. Its spread is exponential: U.S. cases are doubling every fifth day. At this writing, there is no cure. Medical supplies are insufficient to cope with the widening waves of cases. Intensive-care units are on the verge, and beyond, of being overwhelmed. Testing is inadequate to the task of identifying the extent of infection, much less reversing its spread. A successful vaccine could be 12 to 18 months away.

The U.S. administration has done a solid job in avoiding immediate catastrophe. The ultimate test will be whether the virus’s spread can be arrested and then reversed in a manner and at a scale that maintains public confidence in Americans’ ability to govern themselves. The crisis effort, however vast and necessary, must not crowd out the urgent task of launching a parallel enterprise for the transition to the post-coronavirus order.

Leaders are dealing with the crisis on a largely national basis, but the virus’s society-dissolving effects do not recognize borders. While the assault on human health will—hopefully—be temporary, the political and economic upheaval it has unleashed could last for generations. No country, not even the U.S., can in a purely national effort overcome the virus. Addressing the necessities of the moment must ultimately be coupled with a global collaborative vision and program. If we cannot do both in tandem, we will face the worst of each.

Drawing lessons from the development of the Marshall Plan and the Manhattan Project, the U.S. is obliged to undertake a major effort in three domains. First, shore up global resilience to infectious disease. Triumphs of medical science like the polio vaccine and the eradication of smallpox, or the emerging statistical-technical marvel of medical diagnosis through artificial intelligence, have lulled us into a dangerous complacency. 

We need to develop new techniques and technologies for infection control and commensurate vaccines across large populations. Cities, states and regions must consistently prepare to protect their people from pandemics through stockpiling, cooperative planning and exploration at the frontiers of science.

Second, strive to heal the wounds to the world economy. Global leaders have learned important lessons from the 2008 financial crisis. The current economic crisis is more complex: The contraction unleashed by the coronavirus is, in its speed and global scale, unlike anything ever known in history. And necessary public-health measures such as social distancing and closing schools and businesses are contributing to the economic pain. Programs should also seek to ameliorate the effects of impending chaos on the world’s most vulnerable populations.

Third, safeguard the principles of the liberal world order. The founding legend of modern government is a walled city protected by powerful rulers, sometimes despotic, other times benevolent, yet always strong enough to protect the people from an external enemy. 

Enlightenment thinkers reframed this concept, arguing that the purpose of the legitimate state is to provide for the fundamental needs of the people: security, order, economic well-being, and justice. Individuals cannot secure these things on their own. The pandemic has prompted an anachronism, a revival of the walled city in an age when prosperity depends on global trade and movement of people.

The world’s democracies need to defend and sustain their Enlightenment values. A global retreat from balancing power with legitimacy will cause the social contract to disintegrate both domestically and internationally. Yet this millennial issue of legitimacy and power cannot be settled simultaneously with the effort to overcome the Covid-19 plague. Restraint is necessary on all sides—in both domestic politics and international diplomacy. Priorities must be established.

We went on from the Battle of the Bulge into a world of growing prosperity and enhanced human dignity. Now, we live an epochal period. The historic challenge for leaders is to manage the crisis while building the future. Failure could set the world on fire.


Mr. Kissinger served as secretary of state and national security adviser in the Nixon and Ford administrations. 

National action cannot fix a global pandemic

US, China and Europe must work together to defeat coronavirus

Philip Stephens

web-Global coronavirus rescue
© Ingram Pinn/Financial Times


Once in a generation, maybe once in a century, political leaders must light a bonfire of contemporary preconceptions to confront a shared emergency. This is such a moment. History may ultimately define the 21st-century by the strong geopolitical rivalry between the US and China.

For the immediate future the national interests of these two great powers are one. Those of European nations, too.

Washington and Beijing have been heading in the opposite direction. The blame game — tit-for-tat expulsions of journalists and US President Donald Trump’s description of Covid-19 as the “Chinese” virus — signposts a dangerous route to international breakdown. The vital work of epidemiologists and economic policymakers will be rendered useless if the leading powers choose to fight rather than co-operate.

The coronavirus pandemic began in China, has its epicentre in Europe, and is spreading rapidly across the US. It cannot be beaten in one of these regions unless it is defeated in all three.

Containing it, and capping the human and economic costs, demands that the centres of global power work hand in hand. Prevailing economic orthodoxies have been rendered obsolete by the crisis. As with economics, so with politics. Closed borders and go-it-alone fiscal stimulus packages do not match the scale of the emergency.

International responses have been fragmented. A global threat has stirred the human instinct to turn inwards. Borders are shut. China sought to conceal the initial outbreak in Wuhan before, belatedly, moving to lock down the affected region. Mr Trump spent weeks in surreal denial, dismissing the virus as fake news or a Democratic party conspiracy before veering back towards the real world.

Europeans seem to have forgotten what it is to be, well, European. Germany’s Angela Merkel could once claim to be the guardian of something called European solidarity — the politician who understood that collective action in a crisis yields better results than unilateralism. Not this time. Germany has gone its own way.

The European Commission has been sidelined as 27 nations operate 27 action plans. Italy’s decision to implement a draconian lockdown to limit the spread of the virus was for the benefit of all. It failed to elicit offers from others to share the heavy economic costs. French President Emmanuel Macron has struggled to conceal his frustration.

The news has not been all bad. Central banks have closely co-ordinated interest rate cuts and quantitative easing to underpin the liquidity of financial markets. Scientists are ignoring borders and ideology in the frantic search for treatment and, eventually, a vaccine. Finance ministers from the G7 have agreed to consult weekly on where best to aim their fiscal bazookas.

The “plumbing” of globalisation — the international agencies and bureaucracies that sit below most political sightlines — is largely intact.

A sustained, successful effort against the pandemic — and we are talking about a process lasting a year or more — will depend above all, however, on global leaders maintaining the trust of their citizens. Public confidence is a vital ingredient in every countermeasure. Borders cannot remain closed indefinitely. It is no use suppressing the outbreak in one region only to see it reimported from another.

The obvious framework for international co-operation is the G20 group of industrial and emerging nations — a gathering that reaches across North and South, East and West. The group played a leading role in the wake of the 2009 financial crash in persuading financial markets of the seriousness of political intent to stabilise the global economy. Prodded by India, the present G20 chair Saudi Arabia has called for a “virtual” summit of the bloc.

There will certainly be a role for the G20. But co-operation across so disparate a group will be possible only if the most powerful nations first establish a foundation. It is not too late to create such an inner steering group. As a starting point it would include Mr Trump, China’s President Xi Jinping and, from Europe, say, Ms Merkel and Mr Macron.

There are some things these four leaders can do immediately. Washington and Beijing could begin by calling a halt to the war of words. A second step would be to put to one side all their present trade disputes — suspending punitive tariffs and countermeasures. Mr Trump may need some persuading, but it should not be beyond the wit of his advisers to present such a move as a generous response to the assistance Beijing is now offering other governments.

For Mr Xi, the simple fact of the quartet would offer testimony to China’s leading role in global governance. For Ms Merkel and Mr Macron it would provide an opportunity to re-establish the EU’s coherence and relevance.

And, yes, Mr Trump would also have something to gain. The rapid spread of the virus across the US has already debunked his claim that throwing up barricades is an inoculation against this disease.

Even such small moves may look impossible against the world’s present retreat into antagonistic nationalism. But there is still time. The fight against the pandemic is about to get harder. The world is facing an emergency.

Self-interest demands collaboration. Whether in China, the US or Europe, political leaders cannot ignore this simple fact.

Buttonwood

The agonies of stock-picking in a falling market

A fictional fund manager in his pyjamas ponders capitulation




I suspect that this not a common feeling, but part of me is excited about the crash in stock prices. It is the part of me with a personal-account portfolio.

I have long-term financial goals. I want to hold equity risk, even as others run from it.

If I can buy streams of cash flows at lower prices, I am happy. But another part of me, the professional who invests on behalf of others, is anxious. I try to fuse these two selves. It is not easy.

In my lifetime there have been three bear markets in which the value of shares in aggregate has fallen by half. Perhaps this episode will be as bad—or worse. I don’t know.

I can say this, though. For a long-term investor who doesn’t have to worry about perfect timing, there should be opportunities to buy good stocks at attractive prices. As a private investor, I can wait for risky bets eventually to pay off. My clients may not be so patient.

Nobody knows how this pandemic will play out. Lots of people claim to know, of course. A few of them will be right, by luck or judgment. That’s a matter for the scientists and for economists, too. The biggest insight I have gleaned from economics is that asset prices are set at the margin.

The stock price on the screen is the one at which the most desperate seller and the bravest buyer are willing to do business. When the ranks of the first group overwhelm the second, the result is a rout—or capitulation, in market-speak.

Every recession is unique. This one has the impact of a natural disaster or a nuclear accident.

But every recession is also the same. You can never be sure how deep it will be, how long it will last and what scars it will leave.

China has just experienced its sharpest downturn in a century. That is scary. But 2008 was scary. The dotcom bust was scary. I was a baby in 1974, but my old boss tells me that was scary.

True, this is a different kind of scary. I call my parents every day to check how they are. I didn’t do that in 2008. (I wasn’t trading stocks in pyjamas on a weekday either.) This could be a savage recession. But it will be like other recessions in that there will be a recovery.

In the meantime, stock prices can keep falling. I understand why people are selling. A lot are forced to. They may have borrowed to buy stocks and had their loans called by nervy lenders.

Fund managers that promised low volatility must cut their equity risk. But capitulation is more than this. It is the dumping of stocks that have already fallen a long way. Retail investors are prone to it. But why would any professional do it?

Well, sometimes you sell your duds so you don’t have to talk about them anymore—to the firm’s risk manager or to your clients. Owning a stock that goes to zero is too horrible to contemplate. So you sell.

And sometimes you sell things that as a private investor you would hold onto or double-down on. Clients want you to take risk. But they don’t like what risk-taking looks like when it doesn’t work.

Try explaining, after the fact, why you bought a stock two weeks before the firm went bankrupt, because you judged that, should it survive or be rescued, you stood to make ten times your money.

I am lucky. I have been in the top-quartile of stockpickers. So I have earned the trust to make risky bets in a falling market. A good portfolio in a recession is not necessarily a good portfolio for when the economy recovers.

I know that at some point I am going to have to change tack. I would have to be a genius to time this shift perfectly. And I am not a genius. The best I can hope for is not to get it too badly wrong.

My instinct is to be contrarian, to buy what others now hate. Some industries, such as oil, are outside my comfort zone. The politics of opec are too messy for me to fathom. But I have an eye on mining companies with attractive dividend yields and low debt. If China’s economy rebounds, they will benefit.

And, yes, I am absolutely looking at airlines. A national champion or two is bound to be saved.

In the right situation, I might make a lot of money for clients. Dislocation on this scale will take out the weaker players in every industry. The best companies will emerge even stronger.

I hope I pick the right ones.

There will come a time when the market surveys the whole panorama—bad businesses cleared out; interest rates even lower; fiscal policy in the pipeline; cheaper stocks—and changes direction. I have to be ready for that.

The S&P 500 is America’s capital stock. It will survive (or most of it will).

People will want to fly, stay in hotels and go to restaurants and coffee bars again.

I have to keep that in mind always. I feel queasy. But this is the game I have chosen to be in.

Jobs Report Was Even Worse Than It Looked

Stunning as the drop in jobs in March was, it masked the true depth of the decline. And it is just the beginning

By Justin Lahart


A man delivering food this week in Beverly Hills, Calif. / Photo: apu gomes/Agence France-Presse/Getty Images .


In the waning days of winter, America’s job engine shuddered to a halt.

Friday’s employment report was stunningly grim. The Labor Department reported that the economy shed 701,000 jobs in March—far more than the modest loss of 10,000 jobs economists expected, on average.

The unemployment rate jumped to 4.4% from February’s 3.5%, marking its largest percentage-point increase since 1975. Economists were predicting 3.7%. 



What actually happened was even worse than what those headline numbers showed, with more like three million people losing their jobs. And the bad news has only just begun.

The reason most economists got their estimates so wrong was that the surveys upon which the Labor Department bases its jobs numbers reflect the pay period that includes the 12th of the month. That was before shutdowns enacted in response to the novel coronavirus crisis began rolling across the country and before the number of workers filing new claims for jobless benefits shot higher.

Indeed, jobless claims for the week ended March 14 came to just 282,000, higher than the 211,000 during the previous week but nothing like the 3.3 million reported for the following week, or the 6.65 million reported the week after that.

Part of what probably happened is that, while many employers still hung on to the workers they had, they simply stopped hiring. That matters because, in any given month, there is substantial churn in the labor market.

Millions of workers leave old jobs and get hired for new ones. A sudden slowdown can add up to a lot of job losses even without layoffs. There is also often a delay for some people between getting laid off from a job and applying for unemployment benefits.

The jump in the unemployment rate indicates that the number of people losing their jobs was even greater than what payrolls figures showed. That figure is based on how many people are on employers’ payrolls in a given week, while unemployment is based on a separate survey that asks whether people are employed, unemployed and looking for work, or neither.

The payroll report showed that the number of unemployed people increased by 1.35 million in March from February. That might have happened because employers laid people off but gave them one last paycheck.

That 1.35 million increase in the rolls of the unemployed doesn’t even include anyone who simply didn’t look for work and therefore wasn’t included in the unemployment rate. Looking for work when everything is shut down isn’t easy. The number of people counting themselves as employed fell by 3 million.

April will be even worse. They are calling this a recession, but the danger is that it becomes something deeper.