The Petroleum Fund may own fewer companies – E24

The state is now considering whether the Petroleum Fund should not have to buy and sell “small stocks” to save money.

This may mean that in the future the fund owns fewer than the 9,202 companies in which it invested in the New Year.

It appears in a letter that the Ministry of Finance sent to the Petroleum Fund. There, the ministry says it is considering such changes.

The Petroleum Fund currently measures its performance against an index of around 9,000 companies (the benchmark), which it uses as a “roadmap” for its investments.

– In the letter to Norges Bank, it is mentioned that the Ministry of Finance has started work on the review of the benchmark for equities and that as part of this we want to assess whether the number of companies in the benchmark is appropriate or it should be reduced, writes Secretary of State Kari Olrud Moen (H) at the Ministry of Finance in an email to E24.

– Relatively more expensive

In 2007, the Storting and the Ministry of Finance authorized the Petroleum Fund to increase the share ratio from 40% to 60%. Later, the fund also bought small listed companies.

Until then, the fund had invested based on a benchmark index of 2,400 large and medium-sized companies. Now, on the other hand, it could invest about 7,000 companies. Since then, this universe has expanded to more than 9,000 companies.

– The number of stocks in the benchmark index has increased significantly since 2007, when it was decided to include small companies in the index, Moen writes.

– The letter notes that it is relatively more expensive to trade stocks in small companies than in larger companies and that many small companies can also generate greater complexity and costs in other areas, it adds.

900 items under 10 million

There are many very small holdings in the Petroleum Fund. At the New Year, for example, the fund held shares for five crowns in Taihan Electric Wire Co Ltd.

Most of the items are, of course, much larger, but Taihan was one of a total of 904 companies in which the Petroleum Fund held shares for less than NOK 10 million in New Years, according to the holding lists that the fund presents once a year.

At the same time, the Petroleum Fund owns more than NOK 100 billion worth of stock in companies like Apple and Microsoft, showing the huge gap between the fund’s smallest and largest holdings.

– It makes sense to run this check

– It’s a very exciting topic. You don’t need to own more than 9,000 companies to ensure the fund’s diversification, Chief Economist Harald Magnus Andreassen of Sparebank1 Markets tells E24.

He believes that the Petroleum Fund could have owned fewer companies and still be widely diversified. In many small stocks, it is also difficult to pursue active ownership, he notes.

– It makes sense to accept this check. It will be strange if they don’t end up with fewer small stocks than they do today, he says.

However, Andreassen will not give figures on how many companies the fund should own.

– I don’t dare say that. You have to divide by terrain and divide by sectors. But in general, you don’t have to have a lot of stocks to achieve good diversification of the fund, he says.

– Little ones won’t contribute as much to this anyway because the amounts are so small. I think the fund has a lot more stocks than is needed to achieve diversification and relatively equal returns to the benchmark portfolio, he says.

Small stocks can be expensive

The Oil Fund has grown considerably in recent years, reaching a new record high this week. This weekend, the value of 11,000 trillion crowns is sniffing.

The question is whether the fund can achieve an equally good risk distribution by owning fewer companies and saving money at the same time. Buying from small businesses can be expensive, the finance ministry writes in the letter.

“The growth has come at a time when tradability in many equity markets has fallen, which has made it more demanding to trade large amounts at low cost,” writes the Finance Ministry.

“Many small companies in the index can also generate more complexity and costs in other areas. In relation to the expansion in 2007, p. Eg he pointed out that the expansion would make the exercise of ownership of Norges Bank and the work of the Ethics Council somewhat more demanding, ”the ministry writes.

Some actions are very dominant. The NOK 150 billion stake in tech giant Microsoft alone corresponds roughly to the value of the Petroleum Fund’s 4,000 smaller stakes.

Good and relevant question

– This is a good and relevant question that the Ministry of Finance is asking itself here. There is a chance here that we can get the same risk-adjusted return at lower costs. And if we can save costs, then we will have more money for hospitals and roads, says Espen Henriksen from the Finance Department at BI to E24.

– Today there are 9,000 shares, from 150,000 million in Microsoft to a few thousand dollars in small companies. What is a reasonable level?

– Questions about diversification are very difficult. The more companies, the more expensive it is to carry out the management. At the same time, the more companies, the greater diversification gains. What Norges Bank can answer is how much they could have saved in costs, for example, going from 9,000 to 6,000 companies in the portfolio, says Henriksen.

– Then the ministry itself can calculate what is the cost of less diversification. And then there is a trade-off between the two, he says.

Must reply before February

The Petroleum Fund will now consider how a possible reduction in the number of companies can be implemented, according to an order from the Ministry of Finance.

The Petroleum Fund will be based on both the current “roadmap” (the benchmark) from the index provider FTSE and an alternative “roadmap” from the MSCI provider.

Norges Bank will present its evaluations on February 1 of next year.