Article / 23 October 2015 at 10:49 GMT

Norwegian Lessons Part 1: Takeaways from a thrifty country

  • Resource-rich Norway has long been running a government surplus 
  • Oil money is invested overseas to avoid overheating
  • Norway's example of putting money aside is a lesson for private investors
  • Having to tap its savings once in a while (like next year) is reasonable
  • The Norwegian oil fund is a blueprint for savers
Norwegian crown prince
Crown Prince Haakon and Crown Princess Mette-Marit are probably the most famous Norwegians, but they are not the richest. Photo: iStock
 
By Clemens Bomsdorf

Is it possible to make a link between what you (should) do as a private investor and what the world's richest country (as of 2006, according to economist Jon Arne Isachsen) does? Yes!

Therefore, this is the first in a series of articles in which we will look at Norway, its sovereign wealth fund – known as Government Pension Fund Global – and the lessons private investors can learn from the country. 

Four questions

First, let's see if your financial circumstances and challenges are similar to those of Norway by asking the following four questions.

1. Do you usually earn more than you spend and have money left over to invest?

If the answer is "yes", you have something in common with the kingdom of the north. Since 1996, Norway has been saving part of its oil and gas revenue in its oil fund, which has a value of roughly $875 billion and has become the largest sovereign wealth fund in the world (at least among those that make detailed data public).

2. Is your income, though high, volatile? Are there years where you can’t put money aside and must use your savings?

If that’s the case, you have even more in common with Norway. In 2016, the country will have to divest in order to support government spending for the first time.  

The oil fund's development over the years (click to enlarge):
Oil fund data
 
3. Are you (mainly) saving for an unknown future (such as retirement) rather than for buying, let’s say, a new car?

Again, a "yes" takes you closer to Norway. The fund was recently renamed the Government Pension Fund Global to underline that it has a long-term mandate (though it was not designed to finance future pension spending).

4. Are you beautiful, but rather cold?

Well, although that does describe Norway, it doesn't really matter here.

A country can live longer with debt than a private person

Most individuals should answer the first three questions with "yes", thus behaving more like Norway than Italy, the latter being warm and beautiful but incapable of putting any surplus aside (and it's not the only European country that behaves this way). If that creates a perilous situation for a state, it's also not sustainable for a person. Anyway, back to lucky Norway – and you.

In this first article, we so far have compared a private investor's wealth-creation habits with Norway's and found a few similarities. Now it is time to find out more about the development of the sovereign wealth fund and how its manager – Norges Bank Investment Management and its director Yngve Slyngstad – manage it.

Hence, in the following you will get to know more details on the fund's history and its performance and it will also be elaborated a bit more on why you as a private investor may have similar targets as the Norwegian oil fund. 

Next week: The Norwegian oil fund's investing dos and don'ts

Though these paragraphs will provide you with more knowledge, you might be able to skip this background information and just wait for the second article to come out in which we will look at some of the cornerstones of Norway’s oil fund policy and provide some dos and don'ts for private investors. 

Yngve Slyngstad



With this chunk of the oil fund, you would be the world's richest person, but all NBIM Norwegian director Yngve Slyngstad can offer is food for thought. Photo: NBIM

An abundance of oil and money

Norway has 5.2 million inhabitants and is one of the world's biggest oil exporters (see here and my earlier article on the country here). It has a GDP per capita of $65,000 – second only to Luxembourg, according to OECD data. Its oil extraction industry began in the 1970s and only 25 years later, it established the oil fund. 

The initial payment, made in 1996, was exactly NOK 1,981,128,502.16 (then roughly $300 million). Today the fund's value (as of October 23, 1230 GMT) is NOK 7.2 billion or roughly $875bn. 

The average annual return of the fund is 5.8% (3.8% after inflation), and in addition there are payments from the resources sector to be considered, such as dividends paid by government co-owned oil companies such as Statoil as well as special oil taxes (referred to as "inflow" in the chart above). 

Also note that the NOK exchange rate plays a role in the development of the assets in NOK terms. Fighting a strong NOK is one reason the fund only invests abroad.

While only fixed-income investments were initially allowed, this changed in 1998 and now the fund can also invest in stocks.

The fund's activity is comparable to a private individual investing the part of their income they don't need for consumption. The term "private individual" may refer to someone who is self-employed or owns a company. Just as in the oil business, these professions come with volatile income and an uncertain future. 

However, a closer look at how Norway manages its wealth may provide some insight to individuals seeking advice on long-term wealth creation. 

Cold, but beautiful
 Cold and beautiful ... what works for Norway, works even 
better for its Lofoten islands. Photo: iStock

If you save, you can afford to spend

When Norway's 2016 budget was presented its governors announced that next year the fund will undergo its first net withdrawal (you can find the budget here as well as a Bloomberg article on the issue). While the fund could always be tapped, this is the first time oil revenues alone cannot fully support budget expenditures.

Approximately NOK 3.7bn (net) is expecetd to be taken out, which is roughly 1.8% of that year's expected net oil-related cash flow of NOK 204.1bn. The withdrawal is assumed to represent 2.8% of the fund's value at the beginning in 2016, meaning the state still clearly sticks to its handlingsregel (or fiscal rule) that allows it to take out up to 4% of the fund's value (the assumed yield) annually. 

Sailors Aker Brygge
Sailing is a beloved (and expensive) hobby of many Norwegians. Photo: iStock 

Although this is a remarkable step – and one that is linked to the low oil price – Norway is still behaving like a responsible long-term investor. 

(This is perhaps why the word "plundering", which can be found in the URL of the Bloomberg article, did not make it into the final headline!) 

 
Long-term and very long-term goals

Although the fund is meant to save for future generations, i.e. over the very long term, it can be seen as a long-term investment that is roughly comparable to the investments a person makes during their working life. Why this is so becomes clear when you see the fund's goal, which is summarised on its homepage:

"The fund was set up to give the government room for manoeuvring in fiscal policy should oil prices drop or the mainland economy contract. It also served as a tool to manage the financial challenges of an ageing population and an expected drop in petroleum revenue. The fund was designed to be invested for the long term, but in a way that made it possible to draw on when required."

This is how a person who identifies with Norway should describe their investment strategy.

In our next articles on Norway, we look at some of the cornerstones of Norway’s oil fund policy and provide some dos and don'ts for private investors.


Oslo Café
Incomes are high in Norway and so are prices. 
At this place in Oslo an orange juice costs NOK 36 or $4.40. Photo: iStock 

– Edited by Gayle Bryant and Adam Courtenay

Clemens Bomsdorf is an editor at TradingFloor.com
4y
Alex Forrest Whiting Alex Forrest Whiting
Great piece Clemens
4y
Clare MacCarthy Clare MacCarthy
Clemens' second Norwegian Lessons piece – a superb infographic on the Q3 numbers – is available here:

https://www.tradingfloor.com/posts/norwegian-lessons-part-2-oil-fund-by-the-q3-numbers-6472711
4y
Clemens Bomsdorf Clemens Bomsdorf
Thanks, Alex and Clare! Norwegian Lessons Part 3 (elaborating on the Do's to possibly learn from the oil fund) is out now as well: http://bit.ly/TFnoL3bomsdorf Part 4 to follow next week

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail