31 July 2014

Comment: Lessons to be learned from Norway

14:04, Richard Curran

“Money makes money” and “when it rains it pours” are two old phrases that come to mind when reading about the financial performance of Norway’s sovereign wealth fund. The Norwegians found a whole lot of oil many years ago. They invested the proceeds in a state fund, which is now the largest of its kind in the world. It is now worth 3.8tn krone (€512 billion).

And last year, its second best performance ever, it rose by 13.4 per cent. The fund’s investments in shares jumped by 18.1 per cent last year on the back of a global stock market boom.

Incredibly, the Norwegians have not had to touch the money in the fund, and it just keeps getting bigger. Money makes money! They even announced last week that they had found another 40 million to 150 million barrels of oil in the North Sea.

If the Norwegian sovereign wealth fund is the biggest in the world, whither our own National Pension Reserve Fund? Well at the start of the financial crisis we had around €21 billion in our fund. It was in the top 20 sovereign wealth funds in the world.

Admittedly, it wasn’t built on oil but on a slightly more dubious premise of simply setting aside 1 per cent of GDP each year.

But anyway, the vast bulk of it was pumped into buying shares in AIB and Bank of Ireland. Given that prior to the crisis, it was professionally managed by international fund managers, there is every good reason to believe it would have gained in value by around 13 per cent last year. In fact it grew by 10 per cent last year – not quite as good as the Norwegians.

Instead of sinking it into failed banks, we could have been simply adding value to it through investment gains. At the end of last year the fund was valued at €14.7 billion. But the amount that is not tied up in the banks is just €6.1 billion. Who knows what AIB shares are actually worth right now or in the future. The €6.1 billion not tied up in bank shares, will be used for investment projects in Ireland to help kick start our economy. This may help stimulate badly-needed economic activity but it won’t yield 13 per cent per year.

If we had not been forced into using most of it to prop up the banks, we could have frozen payments into it, but watched it gain in value none the less. Just when we needed to raid it to prop up banks, there was a stock market bull run everywhere else – when it rains it pours.

All we can do is watch the Norwegians get richer and think about how we could have brought in over €2 billion per year in investment returns on our fund.

Unfortunately, we were going to use the money in the fund to pay for public sector pensions in the future after 2030. We still have to find all that money from somewhere. But that is a problem for another day.

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