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Beyond the horizon

Zhou’s audience gasped. This put the notion of a long-term perspective in a new light. If the best part of 200 years was insufficient time to assess the first great political revolution of the modern world, then it was no wonder China’s rulers had the Confucian patience to let the clock run down on Britain’s control of Hong Kong and were content to wait for Taiwan’s inevitable return to mainland rule.

As it turned out, Zhou had misunderstood the question and thought it referred to the so-called French revolution of 1968, which history has relegated to the japes of pampered students thinking it would be fun to re-enact scenes from the Paris Commune while chanting clever slogans such as “It is forbidden to forbid”. No matter. The incident with Zhou only served to reinforce the myth of China’s uniquely-long perspective on things, whereby, for instance, Goujian of Yue, a ruler from 2,500 years ago, remains a potent symbol of China’s latest revitalisation.

Viewed in this context, it seems pathetically short-termist that Norway’s £730bn sovereign wealth fund should boast that it takes a 30-year view on its investments, those in the UK included. Nevertheless, various interested parties seized on the fund’s commitment to the UK as some sort of endorsement of the country’s long-term prospects after Brexit.

Predictably, the truth is more nuanced. Even so, the fund’s stance prompts two questions:

●  What does the fund really think about the UK?

●  What does it mean to have a 30-year investment horizon?

First, let’s remind ourselves about the basics of the cumbersomely-titled Government Pension Fund Global. The best overview of Norway’s oil fund is what we wrote two years ago – The Norwegian Dilemma (2 December 2016). In the intervening time, the fund has grown a little – despite sustaining a 6.2 per cent loss in 2018 – but not much else has changed. It remains massive. To put its size into context, it is equivalent to owning almost a fifth of all 1,900 or so companies listed on the London Stock Exchange or owning all of the eight biggest companies in the FTSE 100 index – from Royal Dutch Shell (RDSB) down to Rio Tinto (RIO). And its aim remains constant – to channel government surpluses from Norway’s oil and gas revenues into a fund that will generate a long-term real return of about 4 per cent a year.

To do this, the fund’s managers choose what is arguably a dull – and perhaps inappropriate – investment plan. Mostly they invest in listed equities with a strong bias towards the developed world. At the end of 2018, 66 per cent of the fund’s £727bn was in equities; almost 31 per cent was in fixed interest (mostly government) stocks and 3 per cent in a property portfolio.

Of the £480bn or so in equities, almost 39 per cent was in US stocks and 34 per cent in European ones. The names of the major holdings are predictably conventional. The four biggest holdings are the technology titans (by order of the value of the fund’s stakes) – Microsoft (US:MSFT), Apple (US:AAPL), Alphabet (US:GOOGL) and Amazon (US:AMZN). Facebook (US:FB) trails 11th on the fund’s list. Switzerland’s biggest companies by market value – Nestlé (SIX:NESN), Roche (SIX:ROG) and Novartis (SIX:NOVN) all figure in the top 10, as does Royal Dutch Shell.

Within this mix, the UK is a favoured nation; 9.4 per cent of the fund’s equity-market value is in UK shares, a higher proportion even than Japan (8.9 per cent), which has the world’s second biggest equity value. It was ever thus. Back in 1998 – the first year that the fund invested in equities – its benchmark was to have 10 per cent of its equity capital in UK companies. The next biggest European exposure was – and is – Germany, but that is less than half the UK’s level. This close connection to the UK extends to the fund’s property portfolio, where more of its office and retail space is in London property (23 per cent) than in any other city. New York is closest, with 20 per cent.

Given this, it is fairly predictable that the fund’s chief executive, Yngve Slyngstad, should mouth comforting platitudes about the UK. “We will continue to be significant investors in Britain,” he told listeners to the fund’s annual conference call last week. “We foresee that over time our investments in the UK will increase.” Why wouldn’t they? Sure, the liquidity of the UK’s financial markets, the depth of its financial expertise and the strength of its property rights may help. But, given that equity markets tend to rise more than they fall and that the fund still gets the occasional slug of new capital from Norway’s government, then its investments in the UK should increase anyway. Besides, Mr Slyngstad could say much the same about every one of the 73 countries from which the fund draws its 9,158 equity investments.

He added words to the effect that, because the oil fund has a 30-year investment horizon, something so trivial as the UK’s bad-tempered exit from the European Union is not a cause for concern. In the wider scheme of things, he may be right. After all, it’s well known that our perceptions of the future are overly influenced by the present and the recent past. There is every chance that such faulty thinking will apply to Brexit, too. Sure, not even the keenest Brexiteers bother to justify the economic case for leaving the EU any more; everyone intuitively knows that the UK will be worse off. But what’s not known, and can’t be, is by how much – a little or a lot.

Meanwhile, those with capital to invest may be less damaged than those who solely rely on their income. That’s because Brexit’s effects on the earnings of UK plc, about 40 per cent of which come from abroad, are likely to be less than their impact on the domestic economy and its ability to meet the demands of voters whose sense of self-entitlement has been nurtured by 50 years of rising affluence.

But can we take seriously the idea that the oil fund’s managers shape a view on what the world may look like in 30 years’ time and tailor the fund’s holdings accordingly? Or are they simply acknowledging that the fund will still be around in 2049 and so will have to be invested in something then?

Much more the latter than the former. And this is true not just for Norway’s fund, but also – and more relevant for readers – for all investors in the game for the long haul. It simply isn’t possible to have much notion of what the world will look like in 30 years’ time. Sure, homo sapiens will still walk on two legs and laugh, cry and squabble, but the investment context in which they will do these things is largely guesswork.

For a proof of sorts, contrast the 20 biggest holdings in the fund’s current portfolio with the picture 20 years ago when the fund was first allowed to invest in equities. That year – 1998 – its external managers binged over £7bn in 2,000 holdings worldwide. As a result, the fund had initial stakes in 14 of what are today its 20 biggest holdings. Does that imply a prescience as crystal clear as the waters flowing into those Norwegian fjords? Not a bit. From day one, the fund was basically an index tracker. Apart from some exceptions for companies deemed politically incorrect, the fund hoovered up everything that was in its benchmark index. So, obviously, 20 years ago it would have a high proportion of whatever came to be today’s giants.

Tellingly, of the six in today’s top 20 in which it did not have stakes back in 1998, four did not exist – no surprise in the case of Facebook since Mark Zuckerberg was still four years away from arriving at Harvard – and two were listed on exchanges that the fund had not yet ventured into.

Similarly, I can think back all of 30 years to the time when Bearbull’s alter ego was running a small unit trust and consider some of the stocks I thought were great then. Of those still around, there was Marks & Spencer (MKS) and what would become Vodafone (VOD); among smaller companies there was defence consumables supplier Chemring (CHG) and foundry operator Castings (CGS).

Today, no one would label those ‘great’ or imagine a fund would want to keep them for the next 30 years. There is no telling whether that view would be right, but it does not actually matter. The point is that they all had their time in the sun and produced the market-beating returns to show for it. They were part of the long-term process and they did their job. One can ask no more.

So the 30-year investment horizon – or some similarly long period – simply means that you will be sticking around. You can do that passively – in which case, a low-cost fund may do nicely – or you can do it actively. That’s more involving, more demanding yet not necessarily more rewarding. But one thing is certain – if you take the active route, the portfolio with which you start will bear little resemblance to the one with which you finish and its appearance will change several times along the way. That’s how it is. Whatever they say, change is the only constant because you’ll never know what lies beyond the horizon.

Bearbull Income Portfolio, 28 February 2019     
Shares boughtDate dealt Price (p)  Cost (£) Price now (p) Value (£) Change (%)v All-Share (%)
13,150NatWest 9% PrefsNov-1212116,01613918,27915-11
14,000Real Estate Credit InvJan-1311015,43216923,7025527
29,250Air PartnerSep-148424,7158424,4530-3
8,800Manx TelecomAug-1520217,77618115,884-11-18
15,550Empiric Student P’yNov-1511117,3729614,928-14-23
12,250Randall & QuilterMar-1815719,35416119,72335
3,450Greene KingMay-1857519,96965922,7361524
850The Williams Co’sAug-18$29.8720,136$26.7017,324-11-5
30,000Topps TilesNov-186318,9896720,01064
     Interest accrued6  
Starting capital (Sept 1998) £100,000Total283,882184 
FTSE All-Share index  2,384 3,88963 
Retail Price Index  164 28372 
Income distributed:  £191,409