Norway Fund Told to Forget Adding Risk Until Oversight Fixed

Aug 18, 2014 6:46 am ET

(Updates with comment from Christian Democrats from eighth paragraph.)

Aug. 18 (Bloomberg) -- Norway’s $880 billion sovereign wealth fund can’t be allowed to chase riskier assets until lawmakers fix the oversight gaps that emerged in connection with its purchase of Formula One shares, according to the biggest party in the nation’s parliament.

“The Formula One case was quite an eye-opening experience for politicians who are dealing with issues regarding this fund,” Marianne Marthinsen, the Labor Party’s finance spokeswoman, said in an interview in Oslo on Friday. “It illustrates that we need a strong system of monitoring.”

The comments show the minority Conservative-led government will struggle to find backing in the legislature to avoid changes in how the world’s biggest wealth fund is run. Finance Minister Siv Jensen said last week she saw no need for a change in the fund’s oversight and praised its management.

Calls for tougher standards have grown louder since the wealth fund bought its way into the closely held auto racing group in a move that lawmakers say may have overstepped its investment mandate. The fund can only buy unlisted equity if a company is planning an initial public offering. Formula One’s IPO was subsequently canceled.

An investigation surrounding Formula One Chief Executive Officer Bernie Ecclestone has also fueled the political debate surrounding the appropriateness of the investment. Ecclestone this month paid $100 million to settle a German corruption case.

Missing Returns

The controversy has hampered the wealth fund’s efforts to win lawmaker approval to expand its investment mandate beyond stocks, bonds and real estate. The fund is struggling to meet its 4 percent real return target. Over the past decade, its average real return has been just below 4 percent.

“Clearly” any talk of accommodating the fund’s wish to invest in other asset classes needs to be put on hold until its oversight is reviewed, Marthinsen said.

The Christian Democrats, one of two parties the ruling coalition relies on to govern, also said that changes in the fund’s oversight will be needed before it can start investing in new assets. The fund, which has grown five-fold since 2005, is expected by the government to grow by 40 percent by 2020.

Lawmaker Backing

Addressing such issues is becoming more urgent as the fund grows in size, Hans Olav Syversen, a party member who heads parliament’s Finance Committee said by phone today.

“I’m open to considering both this and that, but I need a solid scientific basis,” he said. The wealth fund should have “a management model adapted to new times.”

Labor has in the past said it’s open to letting the fund buy private equity and infrastructure investments. Real estate was added to its investment mandate in 2010, and the fund targets bringing such assets to 5 percent of its portfolio.

“Real estate is demanding,” Marthinsen said. New asset classes “will require active management at a whole other level than we’re conducting today,” she said.

Control of the wealth fund is split across parliament, the government and the central bank. The Finance Ministry provides a mandate for the fund, which is then managed by the central bank. The bank’s seven-member board, which is appointed by the government and includes the governor and deputy governor, helps oversee the fund. A 15-member supervisory council, elected by parliament, oversees the central bank.

Policy Suffering

Marthinsen said she’s concerned that the central bank’s involvement in oversight of the fund may weaken its ability to focus on monetary policy. Parliament should consider splitting or at least strengthening the bank’s seven-member executive board to address this risk, she said.

“The discussion of whether or not to have one common board is clearly one of the discussions we need to have in the years to come,” Marthinsen said. “We also have people who are quite concerned that the monetary policy is suffering because the management of the fund is taking more and more of the board’s time.”

The Christian Democrats have been pressing for a study into the merits of splitting oversight for as long as four years, said Syversen.

“These are very interesting signals from the Labor Party,” he said. “This can lay the basis for a thorough consideration of the whole organization.”