Interviews
Interview mit Professor Elroy Dimson
Professor Elroy Dimson, der Vorsitzende des Strategierats des Norwegian Government Pension Fund, sprach mit Alternative News über den wirklich langfristigen Anlagehorizont, wie 500 Milliarden Assets under Management auf Assetklassen verteilt werden sollten und ob Anlagen in Alternativen Investments für Kapitalsammelstellen wie Stiftungen überhaupt relevant sind.
„A lot of the wealth of the GPFG is for future generations ... ... this, I think, makes volatility less of a concern.“
Alternative News: Professor Dimson, you are an expert on long-term investments. What is “long term” in your opinion?
Elroy Dimson: When we are talking about investing for the long term, I don’t have a particular period in mind. When you have a risk-free security, the asset’s investment horizon is clear. You invest with a maturity of one year, or two or three, and you know the outcome. But when investing money in risky assets, you always have the possibility of losing as well as making money. When we talk about the long term, we are thinking about expectations. The longer you hold the investment the more likely it is that the expected outcome will be realised. But if it is a risky investment there is always the possibility of doing badly.
Alternative News: You have done a lot of research on financial market history. What part of the research has influenced the Norwegian Government Pension Fund Global?
Dimson: The research is by Paul Marsh, Mike Staunton and me. It appeared in a book called ‘Triumph of the Optimists’, published by Princeton University Press in 2002. It is updated annually in the publication, ‘Credit Suisse Global Investment Returns Yearbook‘. In our research, we document investment performance over the last 111 years for 19 different markets. For each market, we assemble total returns since 1900 for all the main asset categories: common stocks, long term government bonds, money market instruments, as well as inflation and currencies. We also report on factors such as the performance of small-caps compared with large-caps, value stocks compared with growth stocks, and so on.
Alternative News: You are the Chairman of the Strategy Council for the Norwegian fund, with over 500 billion Dollars of assets under management. Can you give us some background?
Dimson: The Norwegian Government Pension Fund Global (the GPFG) is indeed huge, and it is still growing. By the end of this decade, the GPFG will have an average equity holding of roughly two percent of every listed company in the world. The Fund’s owners are the citizens of Norway. With a population below 5 million people, the number of Fund owners is no more than the population of the part of London in which I live. The people of Norway are interested in what is being done with their wealth, and they are represented through the Norwegian Parliament by the Minister of Finance, who is advised by an investment department. The Strategy Council, which comprises four independent experts, provides input on long-term strategy for the Fund.
Alternative News: And who actually manages the GPFG’s assets?
Dimson: The Ministry delegates portfolio management to the manager, namely to Norges Bank Investment Management (NBIM), which is an arm of the central bank. So my Strategy Council colleagues and I offer guidance to the Ministry of Finance concerning the "big picture" strategy. But the way funds are actually administered is the responsibility of the money manager, NBIM.
Alternative News: How have assets been allocated?
Dimson: The GPFG was set up as an Oil Fund in the 1990s with an injection at the outset of cash. The cash found its way into bonds and at an early stage the bonds migrated partially into equities. The equities were initially focussed on developed stock markets, but gradually emerging markets were introduced. In 2002 the Fund embraced corporate bonds and MBSs. In 2004 new ethical guidelines were developed. In 2007 they decided to increase the percentage in equities, while extending coverage to small-caps, all emerging markets, and in 2008 they commited to real estate. You can see this evolution in the chart, and the focus is now on planning towards 2020.
Alternative News: You were involved in the increase from 40 to 60 percent in equities. The pronouncement was made at the start of the financial crisis. Was it a good decision?
Dimson: The GPFG’s investment returns tell the story. As you can see in the table, the difficulties of the crisis years were offset by good returns in 2010. Consequently, over 2008–2010, the Fund made a useful 1.8 percent. When you look at the period 1998–2010, which embraced two market collapses, the GPFG made 5.0 percent, which is ahead of the Fund’s benchmark. In retrospect, buying stocks during the recent crisis was fortunate, since the Fund benefited from the post-crisis recovery in stock prices.
Alternative News: What do you have in mind when you explain that the Government Pension Fund Global is so different from regular pension funds?
Dimson: Pension funds make available benefits for retirees and for employees who are making provision for their retirement. But a lot of the wealth of the GPFG is for future generations – for children, grandchildren, great-grandchildren, and their descendants. The Fund does not resemble someone who is saving for his child’s education or for his teenager’s wedding. It is truly long-term in its horizon, and lacks explicit liabilities. This, I think, makes volatility less of a concern.
The evolving strategy of the Norwegian GPFG
Alternative News: What about the bond side? Are rising interest rates a threat to a big fund like the GPFG?
Dimson: Some people do believe that interest rates have to go up generally, and so bond prices have to go down. I agree that short-term interest rates are unusually low and may rise, and there is of course a risk that long-term interest rates rise as well. But who knows? Taking a view on interest rate fluctuations is the responsibility of the manager, NBIM, and not of the Strategy Council or of the Ministry. The strategic questions are whether to have a benchmark that embraces assets like credit-risky bonds, real-estate, and other asset groups. These strategic decisions cannot be based on a tactical judgements about near-term bond market prospects.
Alternative News: Well, we now have a feeling for what you have in mind when you are talking about the long term. But allow me to take a look at the past ten years, because in this period a lot of our readers have made their investment experiences. Because of those – very often – bad experiences a lot of investors are looking for more stability in their returns.
Dimson: Yes, over the last decade investors in large-cap equities have been disappointed. But that’s not true for all equity investors. Small-cap equity investors have done well over the last decade, emerging markets also did well, and so did commodities. Large-cap equity investors in large stock markets have been disheartened. But ten years is not a very long time, and the setback of equities confirms that they are indeed risky. Over the long haul, equities have beaten bonds and bills in every one of the 19 countries we examined, as illustrated in our charts.
Alternative News: What if investors add overlay investments to their portfolios so as to give them a style tilt?
Dimson: The way we should consider such investments is not simply to think about different packages of assets. Some hedge fund assets are simply stock-selection funds, which belong among an investor’s equity holdings. Others are bond funds, and fit better among fixed-income holdings. And yet others may be uncorrelated with traditional assets. Even a value-growth strategy, which is long value stocks and short growth stocks, generates performance that cannot co-move materially with the equity market. There are many different strategies like this, which in aggregate resemble some hedge-funds and prop-trading strategies. They are discussed in the Strategy Council’s last report, ‘Investment Strategy and the Government Pension Fund Global’ by Elroy Dimson, Antti Ilmanen, Eva Liljeblom, and Øystein Stephansen.
Alternative News: Can such factor exposures be delivered as alternative investments?
Dimson: Some of these uncorrelated overlays are
suitable for large, long-horizon investors like the GPFG. What is my opinion
about this? For a large, long-horizon investor, the asset manager’s compensation
scheme is important. The question is whether the investment product is worth 2
plus 20. You ask whether it is worth adding alternatives to a portfolio, and I
say it depends on the price. From the viewpoint of a truly long-term investor,
I would say that
2 plus 20 may make the manager richer than it makes the investor.
Alternative News: That is a wise answer …
Dimson: ... let us suppose you are an individual investor with assets in Geneva, and you expect to spend a lot of your wealth in some years’ time. You might correctly be concerned not to lose the principal. But if, on the other hand, we are talking about a fund that by 2020 may own an average 2% of every listed company in the world, and which is thinking of the next 50 or 100 years, than that is a very different challenge. Large, long-horizon investors should not try to ensure that in every individual year they do not lose money.
Alternative News: Should an endowment consider investing in a hedge fund?
Dimson: There is no one-size-fits-all solution. I have done research on the 61 big college endowments in the United Kingdom. Some are wealthy, some are not. Some endowments needs to have a floor on performance, and for them capital preservation may be of great value. Therefore, hedge funds are part of the universe in which endowments might invest.
Alternative News: Your opinion about Private Equity?
Dimson: Private Equity comes packaged with particularly extreme illiquidity. So it is appropriate for investors that will not need cash. Private Equity created a lot of problems for endowments like Harvard and Yale during the crisis. So again: the question is whether such endowments can forego marketability in their investment portfolios.
Alternative News: Norway has started to invest in Real Estate. What are the experiences and the expectations?
Dimson: The target exposure to real estate is 5 per cent. This is a large sum to invest. It takes time to learn how to invest wisely in the property market. Initially, the GPFG has started out by co-investing in real estate. For the market, that means that a quite large amount of money is flowing into it. The Fund’s 500 billion Dollar valuation may double to 1000 billion Dollars by 2020. The initial commitment to real estate was 5 per cent. Just imagine 5 per cent of 1000 billion at the end of the decade: 50 billion Dollars is a lot of money to be investing in real estate. The target exposure to real estate will, inevitably, take some time to build up.
Alternative News: Thank you very much for those insights, Mr. Dimson.
Das Gespräch führte Uwe Lill
Vita
Prof. Elroy Dimson, Ph.D ist der Vorsitzende des Strategierats des Norwegian Government Pension Fund – Global, dem mit rund 500 Milliarden US-Dollar unter Verwaltung größten institutionellen Anleger in Europa. Zudem ist Elroy Dimson in Forschung und Lehre verwurzelt: Er forscht und lehrt an der London Business School, der Cambridge Judge Business School und dem Endowment Insitute der Yale University.
Kontakt
Prof. Elroy Dimson
Email: edimson@london.edu
14. Jahrestagung Uhlenbruch Verlag
Wenn Sie Elroy Dimson live erleben möchten, bietet Ihnen der Uhlenbruch Verlag dazu die Gelegenheit. Der Verlag veranstaltet am 7. und 8. Juni 2011 im Hilton in Frankfurt seine 14. Jahrestagung, die inzwischen zu den renommiertesten in Deutschland gezählt werden darf. Als Key Note Speaker wird Professor Elroy Dimson, Ph.D. erwartet. Er ist strategischer Berater des Norwegian Government Fund, der mit rund 500 Milliarden Dollar zu den größten der Welt zählt. Darüber hinaus hat sich Professor Dimson einen großen Ruf durch seine Zeitreihenanalysen zur Untersuchung der Aktienrisikoprämie erworden.
Weitere Key Note Speaker: Professor Kenneth A. Froot, Ph.D. von der Harvard Business School; Professor Antoinette Schoar, Ph.D. vom MIT in Boston; Professor Dr. Dr. h.c. Hans-Werner Sinn, Chef des Ifo Instituts für Wirtschaftsforschung. Erwartet werden rund 250 Teilnehmer aus den Bereichen institutionelle Anleger, Asset-Management-Gesellschaften, Banken und Consulting-Unternehmen.
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