Friday, 10 August 2012

The Norwegian Government Pension Fund Global gambles with a portion of Norway's wealth

In the Q2-2012 report issued today by the Norwegian Government Pension Fund Global (GPFG), the investment fund run by Norges Bank Investment Management (NBIM) which manages Norway's oil wealth, it became apparent that the fund had invested in the Facebook IPO. The report does not state the amount invested, but according to, Yngve Slyngstad, CEO of the NBIM and CIO Allocation, the fund's ownership now represents 0.1% of the Facebook market cap and  " it is a small investment".

Well, "small" is relative, but in absolut terms it means the following:

If we assume the fund did not sell any shares during the quarter, it means that NBIM bought 0.1% * USD 38 IPO price per share * 2,138.09 million shares = USD 81,248,420 worth of Facebook shares. Assuming a NOK/USD exchange rate of 6.0, the total investment is NOK 487,484, 520, almost half a billion Norwegian Krone. Further, as the shares fell from the USD 38.00 IPO price to USD 31.10 at June close, the loss in USD is 18.2% (NOK 88.5 million assuming NOK/USD of 6.0). Assuming GPFG has not sold/bought any shares in Q3-2012 and based on the share price as of market close 9 August of USD 21.01, the investment has lost 44.5% of its value since the IPO, a loss of NOK 216.8 million. This might be a "small" investment for Slyngstad and NBIM, but it is nonetheless an awful lot of money, especially for a small country like Norway with a population of five million people. It is very concerning indeed that a money manager rubs this off as "small" and the statement demonstrates a lack of respect for losing money and a lack of understanding of prudent investment management.

As any investment manager and stock market investor knows, you'll win some and lose some, and it's the net that counts. But, what is more concerning than the above loss, is this: according to the NBIM website and investment mandate,

"NBIM seeks to safeguard the long-term financial interests of Norway's future generations through active management and active ownership".


"NBIM uses a more active strategy to enhance performance and beat the return on the benchmark. A large share of the fund’s equity investments are managed using this type of strategy".

By any standard, buying the Facebook share does not represent an investment, it is rather pure speculation (see the article Facebook Valuation).  The NBIM through the GPFG and it buying Facebook shares has used a portion of the fund to gamble with Norway's wealth, period. It could very well be that the Facebook exposure was a result of an investment in a particular index fund, but if that was the case, NBIM could have for example shorted the shares to hedge this exposure. The Ministry of Finance, who sets the investment mandate for NBIM, needs to find out if there is more such speculation going on at NBIM and to stop it as a matter of urgency before the fund waste more of Norway's wealth.

In Q2-2012, the equity investments of GPFG fell by 4.57% (return meassured in International currency, a basket of the currencies the fund invest in - for some reason and contrary to all financial reporting standards, the fund does not report the return in NOK, which deserves appropriate criticism). The income statement for the quarter showed a loss of NOK 100.313 billion for "equities and units". The Facebook loss hence represents about 0.088% of the funds losses on equity investments during the quarter. Now, that is small in percentage terms (due to the massive size of the fund and the huge loss in Q3), but it money terms an estimated loss of NOK 88.5 million on one single investment, in one quarter, is large by most standards. And this loss will grow even bigger in Q3-2012 unless the shares are sold.

Notes: it could be the case that NBIM owned more than 0.1% of Facebook during the quarter based on Slyngstad's comment that the fund "now ownes 0.1%. If that was the case, the losses calcualated above would be even higher. If the initial investment was less than 0.1% and it accumulated shares on falling prices during the period, the losses would be smaller than calculated.

Facebook share price since IPO 18 May 2012 to 9th Aug 2012


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