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Prof. Pierre Collin-Dufresne, SFI@EPFL, expert for the Norwegian sovereign wealth fund

Posted by
Anita Belitz Krasniqi
on
Thursday, May 12, 2016 - 13:00

SFI Prof. Pierre Collin-DufresneSFI@EPFL, was recently asked to act as one of two top experts to a committee appointed by the Norwegian government to assess the equity portion of the 7 trillion NOK (over $850 billion) Government Pension Fund Global. 

Collin-Dufresne was asked to provide analytical tools and identify factors that are crucial to evaluate the fund's relative equity and fixed-income allocations, which combined make up more than 97% of the fund.  The fund's strategic asset allocation is currently 60% equities, 35%-40% fixed income, and up to 5% non-listed real estate. The committee, chaired by Senior Economist and Adjunct Professor Knut Anton Mork, is analyzing the Norwegian government's capacity to bear financial risk and the trade-off between risk and expected returns for different equity portions. It may recommend changes to the equity and fixed-income allocations. 

The Fund was established in 1990. It is not a conventional pension fund, but a sovereign wealth fund set up to smooth oil revenues over time and across generations. It has continued to grow rapidly thanks to oil price increases and is now larger than any pension fund in Europe. The committee is planning for the "day when the oil will run out, [that] the return on the fund will continue to benefit the Norwegian population".1

Collin-Dufresne emphasized that investment strategies and portfolio allocation should not be set in isolation from the broader economy. The relative allocation to equities and bonds depends on the risk associated with the owner's other assets and income sources, on the nature of the outstanding liabilities, and on the nature of the equity risk premium.  In particular, the choice of portfolio will depend on whether non-financial income is bond- or stock-like and how government consumption commitments are perceived by the population. Part of his conclusion was that oil and commodity exposure and technological risk should be planned for in the financial wealth component of the fund and/or the benchmark design.

Indirectly, Collin-Dufresne showed how the work on the research frontier is of immediate practical relevance for a large asset manager, such as the Norwegian sovereign wealth fund. 

Download presentation slides here

The Government Pension Fund Global follows a responsible investment strategy and has an ethical investment mandate. It has divested from a number of companies due to climate change related risk over the last few years. In 2014, it decided to divest from 53 coal companies around the world. 

To read more on sustainable finance see the SFI Sustainable Finance series.

http://www.nbim.no/en/the-fund/