This is pretty standard investment advice, isn’t it?

Now, the Norwegian central bank, which manages the fund, is proposing that it ditch the investments in the very industry the fund was built on.

In a letter to Norway’s finance ministry, Norges Bank wrote: “We conclude that the vulnerability of government wealth to a permanent drop in oil and gas prices will be reduced if the fund is not invested in oil and gas stocks, and advise removing these stocks from the fund’s benchmark index.”

The recommendation rested “exclusively on financial arguments”, it added. Climate change and the environment did not even merit an aside – the advice is all about a fund manager maximising value for their client.

If your income is being made from one particular activity or industry then your investments should almost certainly be made into other activities and industries, shouldn’t they?

You know, diversified investment?

You don’t put your pension into your employers’ shares after all…..

17 thoughts on “This is pretty standard investment advice, isn’t it?”

  1. There are arguments to be made for a national sovereigntist government to invest in the industry that its citizens work in.

    But yeah, it seems like it would be better to invest in other resource extraction areas.

  2. “There are arguments to be made for a national sovereigntist government to invest in the industry that its citizens work in.”

    No because the way the Norway has avoided the Dutch Disease is to very deliberately ensure the sovereign wealth fund is invested overseas. And what’s the point in deliberately investing in your competitors’ oil industry?

  3. “And what’s the point in deliberately investing in your competitors’ oil industry?”

    To reduce company specific risk, (or field specific risk, probably in this case).

  4. “You don’t put your pension into your employers’ shares after all…..”

    Damn. That’s my business plan sunk.

  5. “You know, diversified investment?” Quite.

    Though in my first industrial job I was viewed as an utter heretic when I said that everyone should sell their company shares as soon as it made sense under the terms.

  6. @ both Tims
    If your company is the best investment in the world then diversification will make you less well off than hanging on to all your SAYE/bonus shares. I don’t remember press headlines about Steve Jobs selling Apple shares.
    It is, however, true that diversification reduces the risk for your investment portfolio so one should (except in the case mentioned above) diversify one’s portfolio across a range of investments with the highest available expected returns. So Norway is being prudent.
    Lord Simpson should not have gone to jail because he did not commit a crime according to English law – he should have been put in the stocks and had his ill-gotten (albeit legal) gains confiscated. Stupidity is not yet a crime.

  7. If your money is being generated in the UK, the after-tax surplus should also be invested in the UK. Choosing fund managers in offshore financial centres with lower overheads who invest in enterprises outside the UK is to condone the appalling inequalities of outcome that result. The country is increasingly fed up with these tax abusers and promoters of reasonable diversification.

  8. @ Bongo
    It would help if you knew what you were talking about. If everyone had followed your advice in the past then Americans would still be riding their horses to get from New York to Chicago or from Texas to California as they would have no railroads.
    It is fortunate for the rest of the world that not everyone in the UK in the 18th and 19th centuries shared your view of economic morals

  9. J77

    I tihnk Bongo was joking? At least, that was my take – from other posts and particularly the last 4 words of the one above..:)

  10. @DuckyMcDuckface

    Actually that’s an interesting point.

    My point was really that the Norwegians are trying to avoid investing their oil wealth inside Norway for macroeconomic reasons (Dutch disease avoidance), plus Tim’s point that they are already exposed to oil through their own industry which is why they don’t want to invest their wealth fund into it. I took Paul Rain as saying the government should be investing in the industry to create jobs, but investing inside Norway is contra their macro stance and investing in oil outside Norway doesn’t create the jobs benefits Paul Rain was hoping for, while also falling foul of Timmy’s point that they have enough oil exposure already.

    But you are clearly correct that investing in foreign oil firms is still diversification, since although they will be strongly correlated with domestic oil, it won’t be a perfect correlation.

    Is the correct response to the “we already are exposed to oil by our own position” problem merely that they should downweight their holdings in foreign oil firms, so they still get some diversification benefits but limit their overall exposure, rather than to abolish such holdings altogether as they have done?

  11. @ Bongo
    Sorry: I’ve been reading too much propaganda disguised as news on the BBC and FT websites and failed to spot the difference between that and a spoof.

  12. John77 – your post did rather make me think of when certain states joined the Union. Those who made money in the east and invested in the old west were literally investing in foreign territories. Turned out rather well, which I think was your point.

  13. @ Bongo
    Actually I was hinking of Scottish (and a few Southron) investors funding the building of American railroads and much of their manufacturing industry between 1814 (when they stoppped aiding Napoleon) and 1914. But your example is equally valid.

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