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INVESTMENT STRATEGYNBIM CEO YNGVE SLYNGSTAD
OSLO, 17 DECEMBER 2015
Questions
2
How much should the fund invest in real estate?
Should the fund invest in unlisted infrastructure?
Is there a need to adjust the management framework?
1
2
3
Supporting analyses
3
Our “Peers”
4Source: based on latest annual/quarterly reports, NBIM calculations
GPFG
GICNZ Super
APG
CPPIB
OMERS
CalPERS
Equities
Fixed income
Real Estate
Infrastructure
Private Equity
Other
How much should the fund invest in real estate?
5
1
6
1
MoF gives
mandate to
invest up to
5% in real
estate
2015
London
20142011 2012 20132006 2010
Paris
Berlin New York
Boston
Washington DC
Munich
San Francisco
Norges Bank
recommends
MoF to include
real estate in
the fund
Tokyo and
Singapore
announced as
strategic
markets
Logistics
7
1
More than NOK 200 bn in real estate
2011 2012 2013 2014 2015
Unlisted real estate Listed real estate
11
25
52
141
208
Billion kroner
Source: NBIM
8
1
123 HOLDING COMPANIES
849 PROPERTIES
2,100 TENANTS
14m SQM LOGISTICS
3m SQM OFFICE/RETAIL
13 COUNTRIES
9
1
GPFG real estate returnsMeasured in fund currency basket
5.8%
11.8%
10.4%
8.3%
Source: NBIM
10
1
Real estate returnsMeasured in fund currency basket
Source: NBIM, FTSE, Barclays and IPD
*The IPD global index is released annually. The latest numbers available are the return figures for 2014.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2012 2013 2014 Sep. 2015
GPFG real estate IPD GLOBAL INDEX* 60/40 (Equity/Fixed income)
11
1
Real estate costsOne-off transaction costs not included
Source: NBIM
bps
12
Diversification
Reflect universeInflation hedge
Deliver cash flowReal estate factor
Absolute returnIlliquidity premium
1
13
1
-2
-1
0
1
2
3
4
5
6
7
-2
-1
0
1
2
3
4
5
6
7
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
UK prime office yield UK 10Y inflation-linked bonds yields
% %
There is no clear link
Source: CBRE, BoE
Real estate yields and interest rates
14
1
Confirm that real estate returns follow different pattern, but vary over time
Source: NCREIF, Bloomberg. S&P 500 used as equity index and Barclays 10y government bond index used as bond index.
Private RE calculated using NCREIF, desmoothed to fit autocorrelation of US REITs.
Correlation with equities and bonds
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
1978-1987 1987-1996 1996-2005 2005-2014
Private RE-Equities (US) Private RE-Bonds (US)
15
1
Factors driving real estate returns
* Principal components extraction with orthogonal varimax rotation,
based on 1978-2014 quarterly returns. US data.
Factor loadings F1 F2 F3
Bonds -0.1 0.0 -0.4
Equities0.1 0.6 0.3
Private real estate
(de-smoothed) 0.8 0.2 0.1
Economic factors GDP growth
Industrial output
Consumption
Financial factors Interest rates
Inflation
Term structure
Structural factors Supply and demand
Market constraints
Market leverage
Liquidity
Statistical factors*
16
1
Global trends influencing real estate
GLOBALISATION
TECHNOLOGY
SUSTAINABILITY
DEMOGRAPHY
URBANISATION
E-commerce. Smart buildings
Global cities and supply chains. Retail “show-windows”
Lower costs. Higher demand. Properties for the future
Population and middle class growth. Age increase
Global trend, but highest effect for Asia and emerging markets
17
1
Real estate asset class size
Sources: DTZ Money Into Property (2014), FTSE Global All Cap, Barclays Global Aggregate Bond Index (2015), Oxford Economics (2015)
42%($ 41.6 tn.)
44%($ 43.0 tn.)
14%($ 13.6 tn.)
Equity marketBond market Invested real estate market
18
1
Academic research results
Source: Seiler et al. (1999) and NBIM own research
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Rehring (2012)MacKinnon & Zaman (2009)
Lee & Stevenson (2006)Feldman (2003)
Cheng (2001)Sing & Ong (2000)
Chua (1999)Ziobrowski et al. (1999)
Boyd et al. (1998)Ziobrowski et al. (1997)
Liang et al. (1996)Kallberg et al. (1996)
Giliberto (1992)Firstenberg et al. (1988)
Webb et al. (1988)Irvin & Landa (1987)
Webb & Rubens (1987)Brinson et al. (1986)
Gold (1986)Hartzell (1986)
Webb & Rubens (1986)Cooperman et al. (1984)
Folger (1984)
19
1
Investor target allocation to real estate
Source: Cornell University (2013)
* Including Sovereign Wealth Funds
0% 2% 4% 6% 8% 10% 12%
Commercial Banks & Other
Endowments & Foundations
Private Pensions
Insurance Companies
Public Pensions
Government Entities*
20
How much should the fund invest in real estate?
10 percent defined as a range of +/- 5 percent around target
1
21
Infrastructure investments
A heterogonous set of
investment
opportunities
Secure long-term
purchasing power of
the fund
A wide range of
opportunities available
– total portfolio
approach warranted
2
WHAT?
WHY?
HOW?
2
Distinguishing features
22
Provisions of key public services
Economies of scale
Long project life-cycle
Limited competition
– Natural monopolies
– Regulated assets
– Government concessions
2
Infrastructure investments
23
Long-term investments that could provide attractive attributes
YieldDiversification Stability InflationDuration
Existing
assets
generate free
cash flow
Cash-flow
often
regulated in
long-term
contracts
Cash-flows
often
adjusted for
inflation
Essential
service
High barriers
to entry
Less
exposed to
business
cycles
Relatively low
correlation
with other
assets
2
A heterogeneous set of investment
opportunities
24Source: First State Investments and NBIM. For illustration purposes only.
8
10
12
14
16
18
20
Low Medium High
Public Private
Partnerships
Regulated
Assets
Operating
Toll Roads
Airports,
Ports, Rail
Greenfield
Toll Roads
• Social
infrastructure and
availability of
transport projects
• Key feature is the
absence of
demand risk
• Revenues and
returns often
correlated to
inflation
• Mature toll roads
with known traffic
history
• Mature assets operating under
strict regulatory regimes
• Limited demand risk due to
monopolistic position
• Revenues inflation linked
• Mature transport
assets subject to
demand risk
• Returns often
correlated to GDP
• Greenfield toll
roads with high
traffic forecast risk
• Broadcast transmission,
wireless infrastructure,
emergency communication
systems – technology and
demand risks
Retu
rn, p
er
ce
nt
Risk
2
Communication
The opportunity set is global
25
Substantial funding needs going forward
Source: Blackrock, data sourced from Dealogic as of December 31 2014
North America
Renewables
Transport
Asia & Australia
Privatisations
APAC – growth opportunities
Western Europe
Renewables
Power transmission
Utility deleveraging
South America
Reform agenda
in Mexico, Columbia, Chile
18
32
65
30
916
21
26
2
30
5
8
11
23
14
34
1020
36
26
5
11
2
Energy
Power
Renewables
Social
Transport
Other
2
The opportunity set may increase
26
Substantial funding needs going forward
0
10
20
30
40
50
60
70
Roads Rail Ports Airports Power Water Telecom Total
12.2
11.7
9.5 57.3
16.6
4.5 0.82.0
Sources: McKinsey Global Institute, McKinsey Infrastructure Practice, “Infrastructure Productivity: How to save 1tn USD a year”, January 2013. National Economic
Counsel and the President’s Council of Economic Advisors, “An Economic Analysis of Transportation Infrastructure Investment”, July 2014.
Estimate need based on projected growth 2013-2030 assuming infrastructure stock is maintained at 70% of GDP.
Actual spend calculated using weighted average annual expenditure over years of available data, 1992-2011.
2
Key risks with infrastructure
27
Liquidity risk
Currency risk
Regulatory risks
2
Key pillars of strategy
28
Capitalise on the fund’s comparative advantages
Concentrate on assets with high cash flow visibility
Build on existing competence
Establish strategic partnerships
Preliminary thoughts
2
29
Should the fund invest in unlisted infrastructure?
Yes, but cautious approach is warranted, 0-5 percent range
2
30
3
Management framework
Government Pension Fund Act
Management mandate and ethical guidelines
Annual white paper. National budget and accounts
Norwegian Parliament
Ministry of Finance
Quarterly and annual reports. Advice on investment strategy
31
Index
Currency basket
Risk tolerance
Relative risk
Rebalancing
Financial investor
Not investable
Not given by index
Real estate adds equity-like exposure
No frequently updated market prices
Lack of liquid market place
Strategic investor
Mandate concepts do not work for unlisted3
Real estate index not investable
32
NBIM unlisted RE vs IPD – countries
Notes: IPD data is estimated market value as of year-end 2014, NBIM unlisted data is as of end Oct 2015. Category “Other” in IPD includes Australia (34%),
Canada (47%), New Zealand (3%), South Africa (7%), South Korea (9%).
3
US; 45%
UK; 26%
Germany; 3%
France; 9%
EU; 11%
Switzerland; 5%
Gross exposure NBIM unlisted RE
US; 39%
UK; 11%Germany; 6%
France; 6%
Other EU; 13%
Switzerland; 3%
Japan; 11%
Other; 10%
IPD
Currency basket?
33
3
GPFG currency basket
CHF
CZK
EUR
GBP
USD
Other (3)
GPFG unlisted real estate
AUD CAD
CHF CLP
CZK DKK
EUR GBP
HKD ILS
JPY KRW
MXN MYR
NZD PLN
RUB SEK
SGD THB
TRY USD
ZAR
GPFG FI benchmarkIPD
USD EUR GBP JPY
CHF CAD AUD HKD
KRW SEK MXN DKK
TWD INR ZAR RUB
SGD MYR PLN THB
BRL ILS TRY NZD
IDR CZK CLP PHP
AED COP EGP HUF
PKR
AUD EUR
CAD CZK
DKK HUF
JPY KRW
NZD PLN
ZAR SEK
CHF GBP
USD
Risk tolerance
34
Real estate investments add equity-like exposure
3
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
Hotels Industrial Office Residential Retail
Source: IPD, MSCI, NBIM calculations. US data only. Period 1991 to 2015.
De-smoothed IPD US return series, all auto correlation removed. For illustration purposes only.
Estim
ate
d B
eta
vs. U
S e
quity m
ark
et
We propose to keep as is
35
Ministry of Finance decides asset allocation
– Asset classes
– Ranges
– Rebalancing
Ministry of Finance decides performance measure and relative risk limit
– Reference index
– Currency basket
– Tracking error
33
36
To deal with these challenges…
The IPD index – not adequate
Currency composition of real estate portfolio differs from funding
Real estate not considered in owner’s risk tolerance
Real estate not included in relative risk calculations
3
37
…we propose
The IPD index – not adequate– reference index for fund made up of bonds and equities only
Currency composition of real estate portfolio differs from funding – real estate included in total currency risk
Real estate not considered in owner’s risk tolerance– real estate included in total market risk
Real estate not included in relative risk calculations – real estate included in relative risk
3
Advice
38
How much should the fund invest in real estate?
10 percent defined as a range of +/- 5 percent around target
Should the fund invest in unlisted infrastructure?
Yes, but cautious approach is warranted, 0 to 5 percent range
Is there a need to adjust the management framework?
Yes, a more holistic framework should be adopted,
while MoF takes the most important decisions
1
2
3
OUR MISSION IS TO
SAFEGUARD AND BUILD
FINANCIAL WEALTH
FOR FUTURE
GENERATIONS