Investing for Infinity

9 September 2010



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Norway Expects No Greek Bond Default, Buys Bonds

Norway's sovereign wealth fund is the second largest in the world after Abu Dhabi's. This is what happens when a population of 4.8 million saves its oil wealth for a couple of generations rather than blowing it all Thatcher-style the way the British did. It has been investing in Greek debt of late, the $450 billion Government Pension Fund Global holds loads of Greek debt, as well as bonds of Spain, Italy and Portugal. There is no expectation of default.

Finance Minister Sigbjoern Johnsen explains why the fund is long debt when many others are short or out of the market. "One could say we are investing for infinity. It is important when you look at the time scope of the fund and the investments that there should be a portion of active management." Investing for infinity means only the longest term downtrend is a problem. Everything else is white noise.

Bloomberg reports, "The fund, which manages Norway's oil and gas wealth, mostly buys securities in proportion to their importance in global indexes. By using its leeway to stray from those benchmarks using so-called active management, the fund has beaten those measures by an annual average of 0.3 percent since 1998." In other words, someone in Oslo knows what he's doing.

When investing for infinity, the game in the Greek bonds not price but yield. Yields on Greek 10-year debt are more than 9.5 percentage points higher than on German bonds, up from a premium of 1.15 points a year ago. Yngve Slyngstad, the top dog at the fund said, "Even though the situation is difficult and will continue to be difficult, you get compensated with regard to the yields you are getting." A default or restructuring of the debt would cost Norway heavily, but Mr. Slyngstad and his team are exhibiting great kulden blod, or sang froid in one prefers.

Others are less certain. PIMCO, which runs the world's largest fixed-income fund, disagrees with Mr. Slyngstad. "I see it as being quite a substantial risk that Greece eventually defaults or restructures," said Andrew Bosomworth, PIMCO's Munich-based head of portfolio management.

The difference is, of course, PIMCO can't afford to lose out in a Greek default. Investors would pull their money in a heart beat, and it would take ages to recover PIMCO's reputation. The Norwegian fund doesn't have that problem. That money is there, as Buzz Lightyear would say, "to infinity and beyond." Moreover, if Greece does default, the Norwegian government can always twist arms as a sovereign power in ways a private entity like PIMCO can't.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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