I recently came across an intriguing statement (h/t EIU) by Norway’s Finance Minister Sigbjørn Johnsen about the country’s SWF that he made back in September:
“One could say we are investing for infinity.”
I think we’d all agree, that’s a long investment time horizon! Now, Johnsen made this comment while trying to justify Norway’s SWF investing in debt from Greece Spain, Italy and Portugal (which wasn’t going over all too well). So, it was probably more political rhetoric than anything concrete.
Still, what are the implications for investment strategy of an “infinite” time horizon? It’s a wonderful thought experiment, in my opinion. So let’s run with it for a second.
I’d say that nearly all of the intellectual horse power of asset managers operating in financial markets today is focused on generating returns in the short to medium term (say 24 months out). If you’re investing with a view to generating returns in 24 years or even 24 decades, how would that affect your investment strategy? Such a time horizon, which is backed up by enormous scale, affords SWFs unparalleled ability to hold risky assets.
So, in my view, it should affect their investment strategies. If SWFs (and their masters) really believe the “investing for infinity” comment, then they need to be putting much more money into long-term asset classes — such as unlisted infrastructure assets, private equity and real estate — where private investors can’t hang over the long term.
The real question then is whether SWFs are doing that; are they taking advantage of their “infinite” time horizon? Some are and some aren’t. Let’s start with Norway, which inspired this discussion. As it turns out, when FM Johnsen made his comment about “infinity”, the Norwegian fund didn’t have a direct infrastructure investment program and was only starting to develop a real estate portfolio. In other words, the “investing for infinity” was a nice soundbite to explain away investments in Greek debt, but it wasn’t an “investment belief” that was driving behavior within the fund. (Granted, that may be in the process of changing thanks to Elroy Dimson.)
Now, let’s look at AIMCo, the Albertan SWF, which is pushing hard into unlisted infrastructure assets and really setting the standards in terms of direct infrastructure investing. In other words, it is moving into an asset class that suits its profile, taking advantage of its inherent characteristics. To me, that’s how a fund with an infinite time horizon should be operating. So, well done, Alberta!
This post originally appeared on the Oxford SWF Project website.