The $2tn man
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It must be pretty daunting to wake up every morning knowing that you're in charge of looking after the best part of $2 trillion worth of assets on behalf of your nation. That is a serious chunk of change.

In Norway, that precise task falls to Nikolaj Tangen, who runs Norges Bank Investment Management, known in market circles as the Norwegian Oil Fund. Now, the size of this thing is something to behold. It owns, on average, around 1.5% of every listed company, and it's the largest single sovereign wealth fund on earth. So today on the show, we're asking, how do you make a massive supertanker like that run smoothly? ♪

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London. Now, regular listeners will know that this here podcast usually involves a couple of FT journalists shooting the breeze. But today, I'm very happy to say that I'm joined in the studio here at FT Towers by Nikolaj Tangan himself. He's something of a VIP guest. Nikolaj, thanks so much for joining us today. Thanks for inviting me.

So Nikolaj, for any of our listeners that are not familiar, what is this thing? What is this fund? Well, they found oil on the Norwegian shelf in 1969 and the politicians decided they wanted to put it into a fund to avoid some of the things they had seen in other countries, such as in Holland, where they had something called the Dutch disease, spending too much money domestically.

So in 1996, they put money into the market for the first time, 2 billion Norwegian kroner. That has now grown to 19,000 billion. So it's now the largest sovereign wealth fund. I mean, it's no wonder that countries around the world are kind of looking at this model and thinking, huh, you know, is there something similar we can do over here? There's obviously quite a few of these funds out there, but, you know, it's...

You just need a lot of discipline to do something like this, right? You need a lot of discipline. So there's a spending rule in place, which means that you can only spend up to 3% of the fund every year. And I think another key is that it has broad political anchoring, i.e. it's broad consensus how this money should be spent amongst all the political parties. So tell us, how does it feel to be doing a job like that, right? Because in your previous existence as a hedge fund manager,

You eat what you kill and you answer pretty much to yourself. This is a whole different situation. It's a very different situation, of course. And so you're right, we run the assets on behalf of the country. Now, I don't do it myself. We are 700 people. And importantly, it's also done according to a strict mandate from the Ministry of Finance. And I think that's very, very important. So there is a department within the ministry. They do a fantastic job in defining a mandate and we invest according to that.

Yeah. But how does that kind of responsibility affect the ethos of the fund and how it operates? Well, we all feel very privileged to have that responsibility.

I think the fact that the job is so important in the country makes it easier to attract very, very good people. Yeah. And the fund now accounts for nearly 25% of the state budget. So it is incredibly important despite only using 3% of the fund every year. Yeah. So it's a really important fund. Now, so when we first met in early 2023, you said you thought we were looking at a long period of time with very, very low returns. Hmm.

And that made a lot of sense at the start of 2023 because 2022 was such a horror show in pretty much every asset class industry.

But the world hasn't worked out like that at all. Risk assets have done really well since then. Why do you think that happened and why has it taken so many people by surprise? Well, you know, the stock market's function in life is to try to steal your money every day. And of course, that's exactly what it's done lately in some ways, because many people have been more negative than what has actually turned out to be the case. I still think we are heading for a period of low returns. The time of very low interest rates has gone.

The world is a much more dangerous place. The leadership in the market is very narrow. It's focusing on companies with some kind of AI connection and

The 10 biggest companies now in the US account for something like 20% of the index. So it's very, very concentrated and it's tied into some geopolitical risks, which also we haven't seen before. So there are a lot of things moving here. So does that concentration worry you? Well, the concentration is absolutely worrying. It means that there is a risk in the stock market, which we have never seen before.

Because these are linked generally to microchips. I mean, they are, you know, ASML, which makes the machines to make the chips. They sell them to Taiwan. The chips are designed by NVIDIA and they are sold to, you know, Amazon and Google.

and Meta and Microsoft. So there are very few companies tied into them and they are getting bigger and bigger and more and more important. And so you've just got these points of failure, quite a small number of points of failure effectively that are really crucial for how global markets operate. Yes. Yeah. And when you think about those kind of big names in AI and in microchips and that whole space, it's so concentrated on the US.

Has Europe given up this fight to dominate global markets and dominate the most innovative industries? Well, it's a very interesting, very, very interesting topic. And of course, Draghi is talking about it in his latest report. We have hardly any large tech company in Europe. We are far behind. Will we manage to catch up? I'd be surprised if we did.

Instead, what we do is to put in place a lot of regulation. And so in America, you have lots of AI and little regulation. In Europe, you have little AI and lots of regulation. So it's a very different mindset and it's a very different way to run the industrial policy. So as you say, Mario Draghi, formerly the head of the European Central Bank, put out a really in-depth report on this recently.

What do you think are the sort of recommendations that he makes or the themes that he brings to light that we really should be acting on? Well, it's interesting and we really have to care about it because we have nearly a third of our assets in Europe, right? And Europe has not been a great place to invest because the economies are much slower. It's more difficult to innovate. It's more regulated. The labor market is less flexible, right?

Just a lot of things which makes it more difficult to operate. And that's not something that I think. That's something that we hear from the CEOs of the largest companies in Europe and in the US. So it means that returns in Europe have been half of what they've been in America over the last 10 years, right? This has important implications. Now, how is this going to change? Well, in the report, it talks about huge investments to kind of release the potential returns.

And the question, of course, is do we have the leadership in Europe now to make that happen? And do we have the financial means to actually do it? And do we have the mindset? It takes innovation. It takes the ability and the willingness to take risks. It takes the ambitions. And it takes hard work. So do you feel like Draghi's saying the right things, but it's probably not going to land in the right place? And how realistic do you think it is that we can address this? Well, I think for sure he's saying the right things. I think it's an extremely well thought through report. I think it's an important report.

Whether things will happen, I think it remains to be seen. I mean, there seems to be some movements in the way we think about competition and consolidation in Europe. Perhaps it will allow for some bigger units. We see it, for instance, in the banks. The CEO of UBS said on a podcast with us that, you know, we haven't got a... I mean, the biggest European bank is like number 20 in the world. And we have three telco companies per country.

So are you 30 in Europe instead of having three like they have in the whole of the US? So it may be good news for the consumers who get lower prices, but it's not good for the industrial policy. Do you feel like we'll ever see a real capital markets union in Europe? And thinking, you know, exactly on your point about the number of telcos and the number of banks we've got scattered around Europe, would you like to see just one stock exchange? I haven't got a strong view on that, but whether we will see one soon, I'd be surprised.

You know, every country want to have their own airline and, you know, three telcos and lots of banks. And I'll be surprised. Yeah. Yeah. Me too. So you mentioned geopolitics. So far this year, we've seen markets got a really thick skin to geopolitics. There's a lot of it that investors appear willing to set aside and not react overly strongly to. Why is that? And do you think that is foolish?

I don't know whether it's foolish. I mean, the market is generally pretty sensible, at least most of the time. You know, the implications of the tragedies we're seeing in the Middle East have not been huge when it comes to energy prices. And also, of course, the oil price is less important in the world economy than it has been in the past.

Ukraine has had smaller geopolitical implications when it comes to financial markets. And then the tension between the US and China, I mean, it's ongoing, but it hasn't really had any huge implications so far.

Is the main thing to watch the oil price still for you in terms of how this might reverberate around global markets, thinking of the situation in the Middle East? I don't think so. I think the main thing to watch is the relationship between the US and China, because that has implications for Taiwan and it has implications for what's happening with microchips and the supply chains, which involves pretty much everything we do, you know, chips into everything, phones, smartphones.

Toasters, cars, dishwasher, just everything. Yeah, yeah. I don't think people quite have got their head around how many things will go wrong all at once if the flow of chips around the world would be disrupted. Everything goes wrong. Yeah. You mentioned that markets behave pretty rationally most of the time.

One thing that strikes me is we keep getting these moments where everything suddenly appears correlated and everything goes wrong all at once. You know, we had quite a violent shakeout in markets in the summer, for example, where suddenly it looked like the dollar and Japanese stocks were kind of, you know, all part of the same trade. I mean, it wasn't really violent. It was. It was a blip, but it was like 12% in Japanese stocks in a day. Yeah, exactly. In Japanese stocks in a day. And that was the biggest blip. Yeah. So do you worry about these little

pockets of intense correlation? No, I don't really because of the way the fund is structured. Because the fund we run, it's very long term in its thinking and it's very well diversified. We own nearly 9,000 companies. We've got 30% in bonds. We own companies all over the world, all different types of industries. So I'm not so worried about short term volatility. One of the things that causes these outbreaks of volatility is anything relating to inflation. Do you feel like that bond

beast has been kind of slain? Or do you think this is still something that we really need to keep an eye on? Well, so that's a very difficult question. And there are some new factors here. I think the two new factors is one, the climate effect on inflation. And we see that through raw material prices, we're seeing coffee, you know, chocolate, olive oil, all these kind of things.

But I also think it remains to be seen what will be the effect of the very, very large budget deficits that we are seeing around the world. The combined level of state debt, according to IMF, is now $100 trillion.

And the appetite for that debt can suddenly disappear. And that will have implications for interest rates. And I think the biggest risk to markets now is that suddenly you get a change in that appetite. And you saw it in the UK with trust. Suddenly the confidence disappears and you get these violent moves. That could happen. And I think that's the biggest uncertainty that we face now. Yeah. Someone put it to me earlier today as it's a bit like smoking, right? You know it's bad for you, but you don't know when it's going to make you ill.

And it's similar with... I'm a non-smoker. Me too. But, you know, it's similar with budget deficits, right, with fiscal deficits. Like, you just don't know when this thing is going to bite. You know, people have been making predictions that the Japanese government bond market is going to fall over any day now because of its debt-to-GDP ratios.

So we all know that it's there, but how do you even remotely think about hedging that away or dealing with it? No, we can't really hedge it away because we are, you know, the fund is a bit too large to hedge. There isn't really any counterparty. And also, I think, as you say, you just don't know when it's going to happen. So you just need to...

Do some expectation management. Make sure that your stakeholders and your owners know that there is volatility to come. But I don't think there's anything specifically you can do to hedge that. Yeah. On a different note, so you have a small slice of your portfolio now in unlisted renewable energy infrastructure. It's a really interesting space. So it's early days, but it's proven quite volatile as a part of your portfolio. And one of the reasons that you cite for that is higher costs of capital overall.

Why does that hurt so badly? And what's it like to try and navigate that asset class? Well, we got it into a mandate three years ago, and we were very, very slow in the beginning to get going because we thought that prices were way high, returns way low, too few projects and too many buyers. It was just really not a particularly interesting space. Now that's changed. There is less competition for projects. There are more interesting projects coming online now.

The returns are better. And so I think now it starts to become very interesting. And of course, the whole ESG backlash has also impacted this area. So I think we can make some really interesting investments here. Right. So is it less crowded now, do you think, as a direct result of that ESG backlash? That's interesting. Yeah.

I can't help but notice that you're in town in London at precisely the time that the UK government is on a huge charm offensive to attract private capital to the UK market. That's not why I'm here. But do you have your eye on any particular UK assets, you know, listed or otherwise? And if not, what would be the barrier to that? No, we have equal weight in the UK, right? So we own a lot of great companies here, right?

You have to remember that many of the English companies are world leaders or strong players in various parts of the world economy. And that's why we are invested here. So we own really nice things.

So, equal weight, the problem, I guess, for us is that that means actually quite a small allocation, right? Because we're just a pretty tiny slice of the MSCI world now compared to what we were sort of 20 years ago. Do you feel like this is a good place to do business? Do you feel like the government's sending the right messages? Well, I think it's a good place to do business. I think there are a lot of good places to do business. Yeah, fair enough. And

On a different note, so as you're well aware, markets are increasingly going private. What does that mean for the structure of your portfolio? Do you feel like it means that you miss out on some good opportunities because there's so much that's held in private hands now? Yeah, so that's very interesting. And the board of the Norwegian Central Bank has recommended to the ministry that we should be allowed to buy into private equity funds.

companies. Now, so far, we are not allowed to do that. And there is a political process in place in Norway. And so this will be treated and decided over the next few years. We see that private equity is having some challenges just now in terms of exits and in terms of, in some cases, fundraising and so on. So it could be that it will be a good case to kind of scale in over the next five to 10 years. But

But as I said, this is a political process now. And so we are just waiting for the outcome here. Yeah, yeah. And as part of that, you know, one of the things that I know your fund takes seriously is the costs involved in external managers of money. Do you feel like third party asset managers, you know, are fees too high? Well, the thing is that if you perform, then your fees are generally justified. If you don't, then the fees are too high.

So I do think that for companies which haven't got a stellar performance, their fees will probably be under pressure. But I think it just remains to be seen. I mean, these fees have generally been stable, right, over the years. Yeah, yeah, exactly. But so what would your, you know, there are so many asset managers around the world that would love to get involved in the oil fund. You know, what's your sort of top tip to them for change?

charming you into handing over some of the funds cash? We are not so easily charmed. I think we are more looking at numbers, right? So if you perform and you have a strong strategy and a strong process and are highly ethical and care about ESG, then we will look at you. Yeah.

I have to wrap up with the obvious question, which is around the US election. How much do you think this could be meaningful for asset prices? Or do you think a lot of it is priced and a lot of it is a bit of a wash? Well, so first of all, we don't really invest in America as much. We invest in American companies, right? And I think they have fantastic companies there. I think it's interesting that when the polls change, the stock markets don't react a lot. So it means that it's pretty agnostic as to

what the outcome will be. Yeah. And so I think we'll be fine whatever the outcome is when it comes to the outcome in financial markets. Fingers crossed. Okay, we're going to wrap it up there. But we're going to be back in a sec with Long Short. If bonds are back today, why wait for tomorrow? At PGM, our fixed income strategies help investors uncover hidden value and unlock opportunities.

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Alrighty, it's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. Nikolaj, thanks for being a good sport and playing this game. What have you got? Well, I've got a long that's, you know, learning. That's just key to my life. And so I've done...

several educations and I just absolutely love learning and which is one of the reasons why I also think it's fun to have my our own podcast where I can interview you know the best leaders in the world and read up on what they're doing and read the books and really help educate me and you know last weekend I had this mushroom instructor taking me around the Norwegian forest to help me find new mushrooms and new types of things that I've never eaten before so I just think you can

learn all kinds of things. And I think it's the meaning of life. You're braver than I am. The idea of picking mushrooms and eating them, just I find absolutely terrifying. No, I think it's great. The short, I just hate bureaucracy and red tape. And, you know, we are trying to get away with as much as we can in the fund. I see how it is impacting businesses in Europe.

You have so much regulation and so much tape. And it's a bit like coming into a bar where, you know, kind of each bottle when you taste it separately, it makes sense and it tastes really well. It's the same with regulation. It's just that when you throw all of it in one bucket, it doesn't taste so well anymore.

And it's a bit like that with all these regulations coming together. That's an interesting analogy. I am long of sympathy for the investor relations team at ASML, which is the big Dutch chip machine manufacturer. The investor relations team somehow managed to put out an earnings report a day early earlier this week. It's one of those horrible moments there, but for the grace of God, stuff goes wrong. I guess it's how you deal with it that matters.

Nicola, you've been very generous with your thoughts and your time. Thanks so much for joining us. Thanks for inviting me. We are going to be back in your feed on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.