The Norway Model - what investors can learn


24/12/2018 7:46:03 PM // Written by Phil Stockton

The Norway Model - what investors can learn

Investors like to copy the investment strategy of well-known fund managers. Others try to emulate the endowments of top American universities. But ordinary investors are probably better off learning from what the Norwegian government has done with its national pension fund with the money generated from its vast oil and gas reserves.

Like Norway, the UK’s North Sea oil bonanza has generated a vast sum of money for a lot of folk. The similarity seems to end there.  A recent article in the Scotsman reminds us that North Sea oil still employs 120,000 people and is generating some £1.2 billion in tax revenue. The article goes on to state that “the North Sea oil industry is an economic powerhouse that helps pay for essential public services.” This is all true yet there is no sovereign wealth fund that will be there to benefit future generations. This is a lesson for us all: save whilst you are earning.

Professor Elroy Dimson is one of the architects of the Norway model which is at the heart of the Norwegian Sovereign Wealth fund. His research focuses on investing for the long term, he currently chairs the Centre for Endowment Asset Management at Cambridge Judge Business School and is Emeritus Professor of Finance at London Business School. Professor Dimson was recently interviewed by evidenceinvestor.com where he had this to say on the Norway model:

“The Norway Model is the name that we gave to the Norwegian way of looking after its national wealth. Norway is quite a recent investor. Before 1996 it didn’t have a sovereign wealth fund.
But although it’s quite new, it has grown a great deal because of the oil wealth in the sea around Norway. They perceived that wealth as belonging to future generations. The Norwegian population, then, have had to become fluent in investment matters because they own a large chunk of that wealth. Every Norwegian has a share in the Norwegian Sovereign Wealth Fund, and every Norwegian is a krone millionaire.

In managing the fund, therefore, it has been important to be transparent and to help people understand how their money is being managed. So, the Norwegian Model is one of investing largely in publicly-traded securities, ones where it’s possible to work out what the portfolio is worth, and to take a transparent view of what’s going on in the fund. So everybody in Norway, when the results come out, sees how much wealthier they are or how much poorer they are. It’s a very transparent process and one that has ensured that the fund is perceived by the population as being theirs: it’s for individual Norwegians and their grandchildren and great-grandchildren when they’re born.”

There are many studies looking at the Norway model in detail. But for our purposes we can focus on the elements that really matter and that we can control.

The first lesson we can learn from Norway is to save and invest a portion of our total income so that the income keeps coming long after we stop earning.

In addition to this the Norway model advocates maximum diversification for the minimum cost whilst insisting on absolute transparency.

Sounds simple enough and we can all do this. Do you? 

Watch a short video on the Norway Model here.  


 

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