• Rubin Miller, CFA

The Norway Model


Anna Odine Stroem, left, and Robert Johansson

TIMMY HUYNH/WSJ; PHOTOS: ASSOCIATED PRESS



Nine years ago, the WSJ published an article about the elite model of Norway investing.


Just last week, the WSJ published an article about the elite model of Norway ski-jumping.


The models aren't so different, and this post is about leveraging the common Norwegian recipe for success: data and humility.



Come for the fjords and fårikål (mutton and cabbage-stew), but stay for the most impressive pension fund on earth. You'll need to be in Norway for longer than a quick jaunt (people aren't eligible unless they've resided in the country for at least three years), but once you're in, you'll stake claim to your share of a government retirement program with an astounding $1.3T, for 5M citizens.


For context, Social Security in the U.S. has $3T, for 330M citizens.


It's all thanks to prudent financial decision-making after Norway discovered an abundance of oil back in 1969, and the country designed an investment strategy to grow their newfound wealth.


Currently, more than half of the $1.3T is from portfolio growth alone! Like most pensions, they have a long-term investment horizon, as the fund is intended to exist in perpetuity, meaning they can buy assets that have higher risks and higher expected returns.


The Norway Pension Fund Global is the single

largest owner of global stocks in the entire world.


Take any institutional investment class, and you'll learn about it: The Norway Model.


The WSJ's Jason Zweig wrote a tremendous article about it back in 2013.


The Norway Model is characterized by minimal use of expensive products, like private equity and hedge funds, and focuses instead on keeping fees low, and diversifying across publicly traded stocks and bonds. It uses passive management – meaning the investment decision-makers don't purport to have the expertise to pick which stocks will outperform which other stocks. They just buy a little bit of every stock, which is an approach steeped in academic rigor. Norway's pension fund currently has money in over 9,100 stocks, across 69 countries!


Most institutional investors do not follow

The Norway Model, but instead follow The Yale Model.


The Yale Model is characterized by usage of expensive alternative assets like hedge funds and private equity. David Swensen had a legendary career as Yale's endowment manager, until he passed away too soon, last May.


The investment approach is sometimes called The Swensen Model because of him, and it's also sometimes called The Endowment Model because most endowments have since copied him. Dozens of decision-makers at elite institutions today worked under David at Yale, before leaving to manage endowments elsewhere like at Princeton, MIT, Stanford, Wesleyan, and Bowdoin. If you're interested, he quite literally wrote the book on institutional investing.


Likely unsurprising to F&F readers I can't broadly advocate for Yale/Swensen investing.


In aggregate, the approach with the highest probability of a successful outcome humbly places small bets on thousands of opportunities, seeking to capture the return of global capitalism, rather than placing larger bets on a smaller number of opportunities. Norway, not Yale.


That said, there are select few institutions for whom The Yale Model can work.


Like, for instance...





It is access to certain people, deals, and funds that make investing in expensive, private products potentially worth it. An institution like Yale has this access, and these connections, in spades. It is the institutions who don't have elite access, most of whom have, like lemmings, followed Yale into this investment approach, whose communities and alumni bases are being poorly served. Not everyone is Yale. The data is out there.


Investors should be more like Norway, and less like Yale.


One thing I love about the Swensen story is that he actually agreed with this. What he was doing for Yale was not what he was broadly advocating for others.


From his obituary in the New York Times, about his second book:


Mr. Swensen was as concerned about the small investor as he was about his endowment. In his book “Unconventional Success: A Fundamental Approach to Personal Investment”(1995), he advised people to keep their costs low and to stick to exchange-traded funds, which invest across an entire index of stocks, rather than investing with money managers or mutual funds that select individual stocks, and where the costs can erode profits.


It was virtually impossible for the average investor to get into the best private funds, he said.



Private markets are very different than public markets.


Public markets (stocks and bonds) are like grocery stores.


Grocery stores have lots of informed buyers, and aisles of options. This creates a boring marketplace, where good products have high prices, and crappy products have low prices, and the spread in price is what makes anything a reasonable purchase for the right person.


Sellers can't charge much more than the going-rate, or else buyers will switch products. Buyers can't consistently find great deals, or else sellers wouldn't make a profit. It's a snooze.


Same with stocks and bonds. Their prices shouldn't be "considered fair" because companies offer similar outlooks (they don't), but because prices adjust for how great or crappy a company is: it's the grocery store equivalent of lobster vs. tilapia, or filet mignon vs. hamburger meat.


Therefore, it should be difficult to imagine a world, with so much information available about public companies, where it's worth paying someone a high fee to guess the future winners and losers. Prices already reflect quality. It's a snooze.


Private markets are more akin to shopping at a rural thrift store.


In private markets, there is less commoditization of products, and more deals to be found – but you need the time and expertise to find it. You also need to know that it even exists, or know the people who know it exists. Investors are trying to access deals, and buy parts of businesses, that don't trade on stock exchanges, and aren't necessarily written about in the news. There's less information available. You can find a gem.


The network and alumni base at a place like Yale has a competitive advantage in this pursuit.


Not all institutions have fallen into the trap of investing like Yale without the resources of Yale. It's worth mentioning Houghton College, and this New York Times article from 2017:




Houghton emerged in the top quartile of all endowments...with a return of 11.85%...

How did tiny Houghton do it? The answer is pretty simple: Houghton got out of hedge funds and all alternative investments a year and a half ago, and moved the entire portfolio to a mix of low-cost index funds and mutual funds at the fund giant Vanguard.


Even more notable is the manager of Nevada's pension fund, Steve Edmundson, who currently manages $54B! From his 2016 exposé in the WSJ:


Steve Edmundson has no co-workers, rarely takes meetings and often eats leftovers at his desk. With that dynamic workday, the investment chief for the Nevada Public Employees’ Retirement System is out-earning pension funds that have hundreds on staff.


His daily trading strategy: Do as little as possible, usually nothing.

The Nevada system’s stocks and bonds are all in low-cost funds that mimic indexes.


Steven Edmundsen

Photo: Jamie Kingham, WSJ



Jason Zweig's aforementioned article about The Norway Model was written nine years ago, and I've kept it in my back pocket the entire time. The message is what the world needs: Norway, not Yale.



And so unsurprisingly I thought about it, when nine years later, just last week, Jason's WSJ colleague Ben Cohen wrote a spectacular article about the Norwegian ski-jumping team, and yet another message the world needs:


This Team From Norway Is Universally Feared. It's Also Unisex.


Ben writes that Norway is the only global ski-jumping team to have merged its men's and women's teams for training.


“We just did it,” said Clas Brede Brathen, the manager of Norway’s

ski-jumping team, “because it felt like the obvious thing to do.”



And as Ben continues, they don’t think of combining the men’s and women’s squads as some token gesture of solidarity. What do the Norwegian team think about the diversity of thought, opinion, and skill?


“It’s a competitive advantage,” said

Christian Meyer, the Norway women’s coach.


“Definitely.”


One thread between Ben's article now, and Jason's article nine years ago, is that they both question a tradition that so desperately needs revision.♜


Ben describes the current landscape of Olympic ski-jumping:


Men have three Olympic medal events. Women have one. Men have a team competition. Women don’t. Men jump on a normal hill and a large hill. Women only get the normal hill. Men can ski fly. Women can’t. Ski jumping is almost literally a sport with a glass ceiling.


What's so familiar about the Norwegian ski-jumping teams joining forces is that the evidence says to not follow the herd.


Their approach is modest, and embraces that other people might know something that they don't. And yes, their country's pension invests with this same methodology.


Successful ski-jumping relies heavily on data, and Ben continues to describe this sport as if it combines the Moneyball-elements of baseball with the aerodynamic complexities of bobsledding.


[It] requires precision, objectivity and numerical calculations. Other sports reward scouting. This one depends on testing. Equipment must be tweaked. Suits can always be optimized.


There is no such thing as overkill for people launching themselves down the side of a mountain.


The men improve because of the additional data shared with the women, and vice-versa, but also the neuro- and athletic-diversity.


“Probably most of the men’s [Norwegian] team didn’t understand how this could profit their development,” Brathen said. “But after quite a short while, they saw that these ladies have another approach to top sport. They are a bit more, let’s say, systematic and reflective.”


The men quickly realized they had more to learn from the women than the other way around.


When there are evidence-based ways to enhance the probability of success, adopt them.


It won't be surprising to you that Marius Lindvik, a Norwegian, won the gold medal in the large hill event earlier this week:


Photo by Lars Baron/Getty Images


Thanks to a well-crafted strategy based in humility, and one focused on improved outcomes rather than adhering to outdated, legacy methods, he shares this individual gold with all of his teammates.


That approach sounds familiar.


The Norway Model.


End.




FOOTNOTES

Steve Edmundsen actually picked up a colleague last year, despite Robin Titus's best efforts. Her argument against it is priceless.


My own investment industry has its own struggles, and we are lucky to have voices like Blair du Quesnay expose the stupidity of our status quo, and Sonya Dreizler and Liv Gagnon create movements like CHOIR to disestablish old norms.