Professor Advises World’s Largest Government-Owned Investment Fund

Berkeley-Haas finance Prof. Richard Stanton was handed a unique assignment last year that, when completed, had the potential to shake stock, bond, and property markets from New York to Hong Kong.

The question: How should one of the world’s biggest pools of money be invested?

Stanton served as one of three outside experts preparing recommendations on where to put the money in the Norwegian fund created to invest the country’s oil riches—the largest state-owned investment fund in existence.

The North Sea off Norway lies atop one of the world’s most bountiful oil fields, which has given the country’s 5 million people almost twice the per-person income of Saudi Arabians. In 1990, the Norwegian government created a fund to invest revenue from oil taxes and drilling licenses to pay future pension costs after the oil runs out.

More than 25 years later, the Government Pension Fund Global, as the fund is formally known, has grown to an almost unimaginable scale, swelling by late 2014 to $857 billion and holding about 1 percent of the world’s stock market wealth. It’s so enormous that it must tread carefully so that its trading doesn’t swamp investment markets.

Berkeley-Haas finance Professor Richard Stanton (right) with NYU finance Professor Stijn Van Nieuwerburgh. Photo by Per Ståle Bugjerde
Norway’s Finance Ministry periodically invites groups of academics and financial professionals to review the fund’s investment policies. Last year, the ministry named New York University finance professor Stijn Van Nieuwerburgh to head a committee charged with examining potential fund investments in real estate and infrastructure.

Van Nieuwerburgh asked Stanton, a finance and real estate scholar with special expertise in mortgage markets, to serve with him. “I chose Richard because he is a world-class researcher in the area of residential and commercial real estate, as well as financial economics more broadly,” Van Nieuwerburgh explains. “I also chose Richard because he is such a nice colleague to work with, with a nice dose of British humor.”

For Stanton, who holds the Kingsford Capital Management Chair in Business in the Haas Finance Group, the oil fund assignment represented a special opportunity to put into practice the finance theory he teaches and uses as a scholar.

Stanton and his colleagues were asked to consider whether the fund’s manager, the Norwegian central bank, should increase the share of investments put into real estate above the current 5 percent limit. They also looked at whether the fund should begin investing in private infrastructure projects—roads, airports, power grids, hospitals, and the like. They began work in April 2015 and traveled to Oslo in December to give their report.

The advisors recommended that the fund be allowed to raise the real estate limit to 10 percent and allow infrastructure investments up to another 10 percent of its portfolio, a major shift given that stocks and fixed-income investments such as bonds currently make up about 97 percent of its holdings. But they were careful not to suggest that the fund rapidly build up its investments in these nontraditional areas, and they warned that global real estate prices are high now by historical standards.

“Our recommendation was to increase flexibility, not that they increase holdings of anything,” Stanton says.

The logic behind these recommendations represents a classic application of finance theory to the real world. For example, most commercial real estate and some infrastructure investments are private, which makes them hard to sell. To attract investors, they must offer a higher return than more-liquid publicly traded investments. That gives a long-term investor like Norway’s oil fund an opportunity.

“They have no need to take money out in, say, five years,” Stanton says. “They’re exactly the kind of fund that should have these kinds of investments.”

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