Nicolai Tangen is used to turning heads in his native Norway. Several years ago, when he was a successful hedge fund manager in London, he arrived at the weekly regatta in a millionaires’ playground in the south of the country in a shiny modernised vessel that put the other shabby chic boats in the shade.
“Everybody else turns up in fairly ordinary boats but Nicolai’s looked like he’d spent a lot of money on it,” said one onlooker in Blindleia, perhaps Norway’s most exclusive area for summer cabins. Asked about it today, Mr Tangen laughs: “I have to admit: I did buy an old boat, and we did tune it up quite a lot. We may have over-tuned it a bit.”
It is an attitude the 54-year-old is taking to the gargantuan $1.3tn Norwegian oil fund where he took the helm last September after a bruising and controversial appointment process. “There are always a lot of things to fine-tune. It’s like a sailing boat: you tighten a bit here, and loosen a bit there, and the thing ends up sailing a bit faster. That’s the goal,” Mr Tangen says in an interview with the Financial Times.
His appointment as only the third head of the investor in its 25-year history comes at a crucial juncture for one of the few sovereign wealth funds to be based in a democracy. Its success has been built on it converting Norway’s oil revenues into financial assets by essentially emulating a huge index fund, owning large swaths of stocks and bonds in line with the markets rather than taking big bold bets on their direction or on individual companies.
But its enormous size — it now owns, on average, 1.4 per cent of every listed company in the world and 2.5 per cent of every European stock after its assets increased almost 30-fold this century — brings new dilemmas about exactly what sort of fund it should be. At its core is the question of whether the fund should be an active investor or a more passive one merely tracking markets, a debate Mr Tangen is keen to have.
It also spills over into the fund’s increasing focus on environmental, social and governance issues at the companies it owns, raising fears of whether it could be viewed more as a foreign policy tool than a financial investor. And the contested appointment of Mr Tangen has sparked a debate about the fund’s own complex governance and the role of the politicians who oversee it.
Underpinning all this is Mr Tangen himself. Appointing the founder of London-based hedge fund AKO Capital with personal investments of almost $1bn as head of the fund was a bold move that sparked a huge political and media storm in egalitarian Norway. Mr Tangen notes that his predecessor Yngve Slyngstad told him that the fund generated more headlines from March, when his appointment was made public, until September, when he took charge, than in the previous 25 years combined. Some still wonder whether Mr Tangen is the right fit and whether he might try to over-tune the fund.
“It’s still puzzling,” says Espen Henriksen, associate professor of finance at BI business school in Oslo, of the selection of Mr Tangen. He questions whether the skills from running an actively managed hedge fund are transferable to an oil fund. “Is a hedge fund manager the right person for the fund?”
Norway put its first krone into the fund in 1996 as an attempt both to preserve its oil wealth for future generations and avoid Dutch disease, where the discovery of natural resources by a country ends up harming its economy. It has been remarkably successful, becoming the world’s largest sovereign wealth fund and providing Norway with about a quarter of its annual government budget through its annual contributions.
Over time, the bureaucrats at Oslo’s finance ministry in charge of its investment strategy have moved it from only owning bonds at the outset to today having 70 per cent of its assets in stocks, 28 per cent in fixed income and the rest in property. Its first investments in a new asset class of renewable energy infrastructure could come later this year but are unlikely to make up a sizeable chunk of the fund any time soon.
Mr Tangen has little influence over asset allocation, merely accepting the investment mandate and the equities-bonds split given to him by the finance ministry via parliament. Instead, as chief executive of Norges Bank Investment Management, the manager of the fund, Mr Tangen focuses on the internal machinery of the investor. In his office inside the country’s central bank, he outlines how his five-year tenure will focus above all on three areas: performance; communications; and talent management.
Performance is ultimately where he will be judged. The fund has delivered, on average, 0.25 percentage points of excess return each year over its benchmark index of global equities and bonds. “If we can continue that, or perhaps even tweak it up — that’s the goal — then that’s phenomenal. Because the pool is so big, you need relatively small excess returns to make a big difference,” he says in an interview in mid-December. He wheezes and coughs throughout the interview as it is only his second day back in the office after contracting coronavirus, a diagnosis that forced the central bank governor and deputy governor into quarantine, too.
Mr Tangen says his role is to create a “safe area” where people in the fund can take risks. He turned again to sailing for help, saying he consulted psychologists with the UK team to talk about “bouncebackability” — the ability to respond to mistakes. “What I like with sailing is that you can be in the lead, and then the wind changes direction and it’s not your fault — it’s something completely external — and then suddenly you’re last. But that mustn’t impact the way you take risks in the next race,” he adds.
A big fan of learning from other disciplines, Mr Tangen then invokes ski jumping, where professional athletes spend on average just five-and-a-half minutes in the air a year. He argues it is similar with investment, where fund managers might experience just three big crises in their career. Both scenarios require a simulator in which to practise dealing with stressful periods, he says. The oil fund has set up an investment simulator to show fund managers how they have traded, whether they perform worse when stressed, whether they tend to trade too early or too late. “You try to make a trade and it reads your history back to you — are you sure you are not making this too early?” he adds.
Mr Tangen says learning from mistakes is crucial to success in asset management. “We screw up all the time. We screw up 48-49 per cent of the cases. You have to put that learning into a system. That’s what the simulator does. That’s why this is such a humbling industry. It’s just impossible to get an inflated view of yourself because you make mistakes all the time.”
A critical question for the fund is whether its assets should be passively or actively managed. The fund is only allowed to deviate slightly from its reference index of stocks and bonds. That makes it a de facto index fund like those of the leading providers such as Vanguard, according to Mr Henriksen, one where almost all its risk comes from the broader movements of markets rather than individual stockpicking. Its small attempts at active management have produced negligible risk-adjusted returns in recent years, according to several experts. Mr Henriksen argues that running it as an index fund makes eminent good sense in a democracy such as Norway, where a more active strategy could give politicians an excuse to meddle more in the fund’s management.
“It disciplines random ideas from both fund managers and politicians alike. If asset managers could follow their strong beliefs, why couldn’t politicians follow their strong beliefs?” he asks.
Mr Tangen is convinced that the fund is “much more” than a simple index fund, however. He argues that, instead of passive investing, the fund is involved in “enhanced indexing”, where portfolio managers have some latitude to deviate from the reference index. For instance, in 2019 it went underweight on Wirecard, the German payments company that was revealed by the FT last year to have run fraudulent operations, boosting its returns. But Mr Tangen adds that the fund is active in other ways.
“There are so many active decisions going into nearly everything in the fund. The second thing is that one of the very important parts of the mandate is to have the active ownership strategy on the ESG side. The only way you can do that is to also have active management. In my mind, it goes together,” he says.
An example of how the fund is becoming more active on the ownership side is that it started from the beginning of this year publicising how it will vote at annual shareholder meetings five days in advance, a move that could give the fund more influence among other investors. An adviser to a senior Norwegian politician frets that the fund could be seen as an activist investor if the policy is mishandled: “The big worry has always been that the fund could be perceived as a tool of the Norwegian government rather than just an investor. More focus [on ESG] may increase the risk of that.”
Karin Thorburn, a professor of finance at the Norwegian School of Economics in Bergen, says it could backfire on the fund: “If you claim you take more responsibility for governance, and companies do bad things, then how responsible are you?”
Mr Tangen, who dismisses fears of the oil fund being viewed as a foreign policy tool, has already suggested the fund could improve its performance by doing more of the things that today boost its returns. That includes selling out of companies that behave poorly on ESG matters, as well as giving more money to external fund managers to invest in emerging markets or smaller stocks. He says the fund does not need “to take more risks” but that it could potentially “reallocate” its risk budget, which is currently largely tied up in owning real estate.
Prof Thorburn says there are two potential dangers to such a strategy: costs and risks. One of the oil fund’s biggest successes is delivering its returns at a very low cost with just 530 workers: its management costs last year were 0.05 per cent of its assets under management. Using more external managers could push up the fund’s costs; active funds typically charge 1-2 per cent of their AUM for their services.
A more active strategy could also increase both financial and political risk, Prof Thorburn argues. “If you start making lots of bets, it’s great if it goes well but what happens if it doesn’t go well? It’s one of the success factors of the fund that nobody questions the investment strategy. That’s because they’ve had this index tracker,” she says. But she adds that much depends on just how active Mr Tangen wants the fund to be.
Some Norwegian politicians point to the controversy around Mr Tangen’s appointment. He was initially allowed by Norway’s central bank to keep his controlling stake in AKO Capital, which has $22bn in assets under management, as well as his private investments in a blind trust. Politicians from all parties decried the potential conflicts of interest — as well as the problems of holding some assets in tax havens — and forced him to divest his AKO stake to a charitable foundation and liquidate his private investments.
“Parliament showed that, if it really comes down to it, it is in charge of the fund,” says one opposition politician in Oslo. A political adviser adds: “A lot of politicians would love to have more control of the fund and how it invests. This was a warning.”
Mr Tangen insists he bears no scars from the ordeal. “I never spend any time on conflicts, I put them straight behind me,” he says. But he has tried to harness the huge focus on the fund last year to boost recruitment, saying applications have increased 10-fold in recent months.
His focus on talent management goes well beyond recruitment. As befits somebody with a masters degree in social psychology (as well as another in history of art), Mr Tangen says: “People are important for me: how do you make them tick, how can they thrive? You can always do things a tiny bit better.”
He has brought a desire for cross-disciplinary learning from AKO. He has brought in architects from Snohetta, the practice behind Oslo’s spectacular opera house, to talk about creativity; the Norwegian public health officials tackling Covid-19 to discuss making “something complicated easier to communicate”; and former downhill skier Aksel Lund Svindal to learn about risk-taking. Portfolio managers at the fund learned how to interview companies from the police officers who grilled the terrorist Anders Behring Breivik.
To those who argue that a hedge fund manager might be a strange fit for a cautious sovereign wealth fund, he claims his skills are “100 per cent transferable”. He adds that the key is having a “systematic approach” to tasks such as finding and motivating the right people and creating a framework “so people are not afraid of taking risks”.
Mr Tangen is also working at improving communication from the fund, both internally and externally. He continues Mr Slyngstad’s caution of talking about the markets — merely noting that “after periods of great fear, you have euphoria”, while refusing to speculate on how it could pan out. Instead, he says he wants to lift the profiles of many of the others who work in the fund rather than a singular focus on the chief executive. He also talks of the thousands of messages he has already received from ordinary Norwegians “who care deeply about the amount of money they have in the fund”. He has increased the number of meetings, informal communication and information shared with the finance ministry, which sets the mandate for the fund.
“If you think about it, I’ve got one client,” he says, before quickly adding: “Well, basically, I’ve got five million clients. That’s just great fun.”