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From hedge fund to sovereign wealth: Norway’s investment chief eyes active approach

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Nicolai Tangen is used to turning heads in his native Norway. Several years ago, when he was a successful hedge fund manager in London, he arrived at the weekly regatta in a millionaires’ playground in the south of the country in a shiny modernised vessel that put the other shabby chic boats in the shade.

“Everybody else turns up in fairly ordinary boats but Nicolai’s looked like he’d spent a lot of money on it,” said one onlooker in Blindleia, perhaps Norway’s most exclusive area for summer cabins. Asked about it today, Mr Tangen laughs: “I have to admit: I did buy an old boat, and we did tune it up quite a lot. We may have overtuned it a bit.”

It is an attitude the 54-year-old is taking to the gargantuan $1.3tn Norwegian oil fund where he took the helm last September after a bruising and controversial appointment process. “There are always a lot of things to fine-tune. It’s like a sailing boat: you tighten a bit here, and loosen a bit there, and the thing ends up sailing a bit faster. That’s the goal,” Mr Tangen says in an interview with the Financial Times.

Chart showing ESG exclusions are boosting the fund but parliamentary bans dent returns

His appointment as only the third head of the investor in its 25-year history comes at a crucial juncture for one of the few sovereign wealth funds to be based in a democracy. Its success has been based on it converting Norway’s oil revenues into financial assets by essentially emulating a huge index fund, owning large swaths of stocks and bonds in line with the markets rather than taking big bold bets on their direction or on individual companies.

But its enormous size — it now owns, on average, 1.4 per cent of every listed company in the world and 2.5 per cent of every European stock after its assets increased almost 30-fold this century — brings new dilemmas about exactly what sort of fund it should be. At its core is the question of whether the fund should be an active investor or a more passive one merely tracking markets, a debate Mr Tangen is keen to have.

It also spills over into the fund’s increasing focus on environmental, social and governance issues at the companies it owns, raising fears of whether it could be viewed more as a foreign policy tool than a financial investor. And the contested appointment of Mr Tangen has sparked a debate about the fund’s own complex governance and the role of the politicians who oversee it.

Norway's central bank governor Oystein Olsen with Nicolai Tangen. The bank initially allowed the head of the Norwegian oil fund to keep his controlling stake in AKO Capital, but some politicians decried the potential conflicts of interest
Norway’s central bank governor Oystein Olsen with Nicolai Tangen. The bank initially allowed the head of the Norwegian oil fund to keep his controlling stake in AKO Capital, but some politicians decried the potential conflicts of interest © Mosvold Larsen/NTB Scanpix/AFP/Getty

Underpinning all this is Mr Tangen himself. Appointing the founder of London-based hedge fund AKO Capital with personal investments of almost $1bn as head of the fund was a bold move that sparked a huge political and media storm in egalitarian Norway. Mr Tangen notes that his predecessor Yngve Slyngstad told him that the fund generated more headlines from March, when his appointment was made public, until September, when he took charge, than in the previous 25 years combined. Some still wonder whether Mr Tangen is the right fit and whether he might try to overtune the fund.

“It’s still puzzling,” says Espen Henriksen, associate professor of finance at BI business school in Oslo, of the selection of Mr Tangen. He questions whether the skills from running an actively managed hedge fund are transferable to an oil fund. “Is a hedge fund manager the right person for the fund?”

Increasing returns

Norway put its first krone into the fund in 1996 as an attempt both to preserve its oil wealth for future generations and avoid Dutch disease, where the discovery of natural resources by a country ends up harming its economy. It has been remarkably successful, becoming the world’s largest sovereign wealth fund and providing Norway with about a quarter of its annual government budget through its annual contributions.

An oil worker talks to a reporter on a rig in the Johan Sverdrup oilfield. Norway's oil fund owns, on average, 1.4% of every listed company in the world and 2.5% of every European stock
An oil worker talks to a reporter on a rig in the Johan Sverdrup oilfield. Norway’s oil fund owns, on average, 1.4% of every listed company in the world and 2.5% of every European stock © Tom Little/AFP/Getty

Over time, the bureaucrats at Oslo’s finance ministry in charge of its investment strategy have moved it from only owning bonds at the outset to today having 70 per cent of its assets in stocks, 28 per cent in fixed income and the rest in property. Its first investments in a new asset class of renewable energy infrastructure could come later this year but are unlikely to make up a sizeable chunk of the fund any time soon.

Mr Tangen has little influence over asset allocation, merely accepting the investment mandate and the equities-bonds split given to him by the finance ministry via parliament. Instead, as chief executive of Norges Bank Investment Management, the manager of the fund, Mr Tangen focuses on the internal machinery of the investor. In his office inside the country’s central bank, he outlines how his five-year tenure will focus above all on three areas: performance; communications; and talent management.

Performance is ultimately where he will be judged. The fund has delivered, on average, 0.25 percentage points of excess return each year over its benchmark index of global equities and bonds. “If we can continue that, or perhaps even tweak it up — that’s the goal — then that’s phenomenal. Because the pool is so big, you need relatively small excess returns to make a big difference,” he says in an interview in mid-December. He wheezes and coughs throughout the interview as it is only his second day back in the office after contracting coronavirus, a diagnosis that forced the central bank governor and deputy governor into quarantine, too.

Chart showing the equity factors that contribute to relative returns at the fund

Mr Tangen says his role is to create a “safe area” where people in the fund can take risks. He turned again to sailing for help, saying he consulted psychologists with the UK sailing team to talk about “bouncebackability” — the ability to respond to mistakes. “What I like with sailing is that you can be in the lead, and then the wind changes direction and it’s not your fault — it’s something completely external — and then suddenly you’re last. But that mustn’t impact the way you take risks in the next race,” he adds.

A big fan of learning from other disciplines, Mr Tangen then invokes ski jumping, where professional athletes spend on average just five-and-a-half minutes in the air a year. He argues it is similar with investment, where fund managers might experience just three big crises in their career. Both scenarios require a simulator in which to practise dealing with stressful periods, he says. The oil fund has set up an investment simulator to show fund managers how they have traded, whether they perform worse when stressed, whether they tend to trade too early or too late. “You try to make a trade and it reads your history back to you — are you sure you are not making this too early?” he adds.

Chart showing that returns on assets are often volatile

Mr Tangen says learning from mistakes is crucial to success in asset management. “We screw up all the time. We screw up 48-49 per cent of the cases. You have to put that learning into a system. That’s what the simulator does. That’s why this is such a humbling industry. It’s just impossible to get an inflated view of yourself because you make mistakes all the time.”

Active moments

A critical question for the fund is whether its assets should be passively or actively managed. The fund is only allowed to deviate slightly from its reference index of stocks and bonds. That makes it a de facto index fund like those of the leading providers such as Vanguard, according to Mr Henriksen, one where almost all its risk comes from the broader movements of markets rather than individual stockpicking. Its small attempts at active management have produced negligible risk-adjusted returns in recent years, according to several experts. Mr Henriksen argues that running it as an index fund makes eminent good sense in a democracy such as Norway, where a more active strategy could give politicians an excuse to meddle more in the fund’s management.

Nicolai Tangen says of the oil fund: 'It’s like a sailing boat: you tighten a bit here, and loosen a bit there, and the thing ends up sailing a bit faster. That’s the goal'
Nicolai Tangen says of the oil fund: ‘It’s like a sailing boat: you tighten a bit here, and loosen a bit there, and the thing ends up sailing a bit faster. That’s the goal’ © Clive Mason/Getty

“It disciplines random ideas from both fund managers and politicians alike. If asset managers could follow their strong beliefs, why couldn’t politicians follow their strong beliefs?” he asks.

Mr Tangen is convinced that the fund is “much more” than a simple index fund, however. He argues that, instead of passive investing, the fund is involved in “enhanced indexing”, where portfolio managers have some latitude to deviate from the reference index. For instance, in 2019 it went underweight on Wirecard, the German payments company that was revealed by the FT last year to have run fraudulent operations, boosting its returns. But Mr Tangen adds that the fund is active in other ways.

“There are so many active decisions going into nearly everything in the fund. The second thing is that one of the very important parts of the mandate is to have the active ownership strategy on the ESG side. The only way you can do that is to also have active management. In my mind, it goes together,” he says.

An example of how the fund is becoming more active on the ownership side is that it started from the beginning of this year publicising how it will vote at annual shareholder meetings five days in advance, a move that could give the fund more influence among other investors. An adviser to a senior Norwegian politician frets that the fund could be seen as an activist investor if the policy is mishandled: “The big worry has always been that the fund could be perceived as a tool of the Norwegian government rather than just an investor. More focus [on ESG] may increase the risk of that.”

Chart showing the soaring size of Norway’s sovereign wealth fund

Karin Thorburn, a professor of finance at the Norwegian School of Economics in Bergen, says it could rebound on the fund: “If you claim you take more responsibility for governance, and companies do bad things, then how responsible are you?”

Mr Tangen, who dismisses fears of the oil fund being viewed as a foreign policy tool, has already suggested the fund could improve its performance by doing more of the things that today boost its returns. That includes selling out of companies that behave poorly on ESG matters, as well as giving more money to external fund managers to invest in emerging markets or smaller stocks. He says the fund does not need “to take more risks” but that it could potentially “reallocate” its risk budget, which is currently largely tied up in owning real estate.

Prof Thorburn says there are two potential dangers to such a strategy: costs and risks. One of the oil fund’s biggest successes is delivering its returns at a very low cost with just 530 workers: its management costs last year were 0.05 per cent of its assets under management. Using more external managers could push up the fund’s costs; active funds typically charge 1-2 per cent of their AUM for their services.

A more active strategy could also increase both financial and political risk, Prof Thorburn argues. “If you start making lots of bets, it’s great if it goes well but what happens if it doesn’t go well? It’s one of the success factors of the fund that nobody questions the investment strategy. That’s because they’ve had this index tracker,” she says. But she adds that much depends on just how active Mr Tangen wants the fund to be.

Nicolai Tangen has brought a desire for cross-disciplinary learning from AKO, including asking former downhill skier Aksel Lund Svindal to teach his staff about risk-taking
Nicolai Tangen has brought a desire for cross-disciplinary learning from AKO, including asking former downhill skier Aksel Lund Svindal to teach his staff about risk-taking © Fabrice Coffrini/AFP/Getty

Some Norwegian politicians point to the controversy around Mr Tangen’s appointment. He was initially allowed by Norway’s central bank to keep his controlling stake in AKO Capital, which has $22bn in assets under management, as well as his private investments in a blind trust. Politicians from all parties decried the potential conflicts of interest — as well as the problems of holding some assets in tax havens — and forced him to divest his AKO stake to a charitable foundation and liquidate his private investments.

“Parliament showed that, if it really comes down to it, it is in charge of the fund,” says one opposition politician in Oslo. A political adviser adds: “A lot of politicians would love to have more control of the fund and how it invests. This was a warning.”

Burnishing the fund

Mr Tangen insists he bears no scars from the ordeal. “I never spend any time on conflicts, I put them straight behind me,” he says. But he has tried to harness the huge focus on the fund last year to boost recruitment, saying applications have increased 10-fold in recent months.

Architects from Snohetta, the practice behind Oslo’s spectacular opera house, have talked to staff of the Norwegian oil fund about creativity
Architects from Snohetta, the practice behind Oslo’s spectacular opera house, have talked to staff of the Norwegian oil fund about creativity © Santi Visalli/Getty

His focus on talent management goes well beyond recruitment. As befits somebody with a masters degree in social psychology (as well as another in history of art), Mr Tangen says: “People are important for me: how do you make them tick, how can they thrive? You can always do things a tiny bit better.”

He has brought a desire for cross-disciplinary learning from AKO. He has brought in architects from Snohetta, the practice behind Oslo’s spectacular opera house, to talk about creativity; the Norwegian public health officials tackling Covid-19 to discuss making “something complicated easier to communicate”; and former downhill skier Aksel Lund Svindal to learn about risk-taking. Portfolio managers at the fund learned how to interview companies from the police officers who grilled the terrorist Anders Behring Breivik.

To those who argue that a hedge fund manager might be a strange fit for a cautious sovereign wealth fund, he claims his skills are “100 per cent transferable”. He adds that the key is having a “systematic approach” to tasks such as finding and motivating the right people and creating a framework “so people are not afraid of taking risks”.

Mr Tangen is also working at improving communication from the fund, both internally and externally. He continues Mr Slyngstad’s caution of talking about the markets — merely noting that “after periods of great fear, you have euphoria”, while refusing to speculate on how it could pan out. Instead, he says he wants to lift the profiles of many of the others who work in the fund rather than a singular focus on the chief executive. He also talks of the thousands of messages he has already received from ordinary Norwegians “who care deeply about the amount of money they have in the fund”. He has increased the number of meetings, informal communication and information shared with the finance ministry, which sets the mandate for the fund.

“If you think about it, I’ve got one client,” he says, before quickly adding: “Well, basically, I’ve got five million clients. That’s just great fun.”



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BNP under fire from Europe’s top wine exporter over lossmaking forex trades

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BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.



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Will the Fed dare to mention tapering?

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Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

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Dollar traders chill after the tantrum

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It was a classic case of buy the rumour, sell the fact.

In February this year, investors and analysts were concerned that the US economy was beginning to hot up, sparking fears that inflation would pick up and force the Federal Reserve to quicken its policy tightening. This, in turn, led to a surge in US government yields, which propelled the dollar to the year’s high against its peers a month later.

Fast-forward to the end of the first half of the year and inflation in the US is running at its fastest pace since the global financial crisis, but the dollar has weakened for two straight months after appreciating in the first quarter.

Most of the shift is down to US central bankers who rushed to reassure investors that they would keep conditions extremely accommodating, soothing the flare-up in Treasury yields and the dollar’s exchange rate.

As a result, analysts are pretty confident that Fed chair Jay Powell and his board will “look through” the rise in prices at the central bank’s rate-setting meeting next week, keeping the dollar on its current weakening path.

“The combination of steady Fed expectations and a broadening global economic recovery should allow recent dollar weakness [to] continue,” said Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs, in a research note. He expected the euro to benefit the most against the US currency.

Still, some strategists cannot help but wonder whether they should stick to selling the fact, or if it is time to start buying the rumour — and the dollar — again. Despite inflation powering to above 5 per cent year on year, yields on 10-year Treasuries fell to their lowest in three months, in a counterintuitive reaction fuelled by the anticipation that policymakers will shrug off the building heat in the economy.

“Getting US inflation right may be the most important market call for the rest of the year,” said Athanasios Vamvakidis, global head of currency strategy at Bank of America in London.

A decision from the US central bank to keep its policy unchanged would allow the dollar to continue with its weakening path, but maybe not as much as traders anticipated at the beginning of 2021. Vamvakidis notes that currency markets are quietly pricing in less dollar weakness than at the start of the year, with the consensus view now calling for the euro to trade at around current levels $1.21 by the end of December rather than at $1.25.

“For now, high US inflation and a still dovish Fed keep real US rates highly negative and this supports the euro. The question is for how long this is sustainable if US inflation proves persistent,” he said, adding that the bank expected the euro to finish the year at $1.15.

Line chart of Dollar index (DXY) showing The dollar has weakened after first-quarter gains

There are signs that investors might be getting too relaxed. Options markets display little nervousness about the Fed meeting, and Mark McCormick, global head of currency strategy at TD Securities said negative bets on the dollar had begun to build up heavily again in recent weeks.

This adds to the risk of a sharp snapback in the currency’s exchange rate if the Fed does hint at tapering its asset purchases on Wednesday or before analysts expect.

“Don’t expect much more dollar weakness into the summer,” said McCormick.

There are also some offbeat signs that there is a risk of traders betting too heavily on the Fed’s commitment to keeping liquidity ample. Analysts at Standard Chartered noted that Treasury secretary Janet Yellen, a former Fed chair, mentioned the potential benefits of a higher interest rate environment twice in recent weeks.

John Davies, a US rates strategist at Standard Chartered, said that it was most likely that the Treasury chief was defending the Biden administration’s fiscal plans rather than criticising Fed policy, but it was highly unusual.

“It is still striking when the Treasurer of a public or private entity argues for higher borrowing costs,” said Davies.

Investors now expect the US central bank to start cutting its asset purchase amounts in the first quarter of next year, with an announcement pencilled in for potentially September, when the Fed meets for its annual symposium at Jackson Hole, according to Oliver Brennan, head of research at TS Lombard.

But while an earlier than expected announcement would cause some ructions, the real risk is that investors will have to start anticipating the timing of rate increases in the US, which could come sooner and harder than they anticipated.

“The taper sets the clock ticking for the first rate hike and real rates rise [and] big changes in Fed policy are rarely smooth-sailing,” said Brennan.

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