How Not to Run a Sovereign Wealth Fund

Norway’s $1 trillion sovereign wealth fund, which recently announced its intention to remove all oil and gas stocks from its benchmark, has the potential to be the world’s pre-eminent investor. It enjoys more freedom than any other investor in the world, at least on paper. So why is it such a performance laggard, trailing the best-in-class sovereign wealth funds and pension funds it should be leading? The answer offers a cautionary tale to other sovereign funds and pension funds.

No matter how one looks at it, the performance of Norway’s oil fund is mediocre at best. It has generated an annual net real return of just 4.06 percent since its inception in 1996, with the recent bull run in equity markets accounting for a disproportionately large share of this. Net real return in the past five years has been 7.86 percent and a whopping 10.30 percent in the past year. The 10-year return, in contrast, is just 3.85 percent.