Investing for Infinity

Ashby Monk

I recently came across an intriguing statement (h/t EIU) by Norway’s Finance Minister Sigbjørn Johnsen about the country’s SWF:

“One could say we are investing for infinity.”

I think we’d all agree, that’s a long investment time horizon! Now, Johnsen made this comment back in September while trying to justify why the Norwegian fund was investing in debt from Greece Spain, Italy and Portugal (which wasn’t going over all too well). So, it was probably more political rhetoric than anything concrete.

Still, what are the implications for investment strategy of an “infinite” time horizon? It’s a wonderful thought experiment, in my opinion. So let’s run with it for a second.

I’d say that nearly all of the intellectual horse power of asset managers operating in financial markets today is focused on generating returns in the short to medium term (say 24 months out). If you’re investing with a view to generating returns in 24 years or even 24 decades, how would that affect your investment strategy? Such a time horizon, which is backed up by enormous scale, affords SWFs unparalleled ability to hold risky assets.

So, in my view, it should affect their investment strategies. If SWFs (and their masters) really believe the “investing for infinity” comment, then they need to be putting much more money into long-term asset classes — such as unlisted infrastructure assets, private equity and real estate — where private investors can’t hang over the long term.

The real question then is whether SWFs are doing that; are they taking advantage of their “infinite” time horizon? Some are and some aren’t. Let’s start with Norway, which inspired this discussion. As it turns out, when FM Johnsen made his comment about “infinity”, the Norwegian fund didn’t have a direct infrastructure investment program and was only starting to develop a real estate portfolio. In other words, the “investing for infinity” was a nice soundbite to explain away investments in Greek debt, but it wasn’t an “investment belief” that was driving behavior within the fund. (Granted, that may be in the process of changing thanks to Elroy Dimson.)

Now, let’s look at AIMCo, the Albertan SWF, which is pushing hard into unlisted infrastructure assets and really setting the standards in terms of direct infrastructure investing. In other words, it is moving into an asset class that suits its profile, taking advantage of its inherent characteristics. To me, that’s how a fund with an infinite time horizon should be operating. So, well done, Alberta!

7 Responses to “Investing for Infinity”

  1. 1 Rien Huizer January 13, 2011 at 2:42 am

    How does one choose assets for such a long time horizon? Things that will be worth a lot in the future? Like Microsoft in 1981. But what about the zillions of stock one should have avoided, in hindsight? The surest investments for a government to make are those where the gvt controls the returns, like, for instance, a toll bridge. One in its own country of course..Or a state manufacturer and distributor of fine wine with a monopoly..

    I think that it is inherently impossible for agents to receive entrepreneurial returns. And irrational for agents who excell at approaching that to pass much of that on to their principals.

  2. 2 Ashby Monk January 13, 2011 at 6:50 am

    Isn’t your latter point ultimately why institutional investors are increasingly bypassing the fund management industry and “in-sourcing” certain key asset classes (namely infrastructure)? I guess my thinking (beyond the nifty tricks governments can play by, in effect, investing in assets they already control) was to say that there are certain assets that do offer long-term returns for which private sector players can’t have the staying power…simply because they’ll be long gone by the time the investor is ready to sell the asset. Some of these infrastructure deals have 99 year leases associated. Anyway, I still think it’s a fun thought.

    On the “stock picking”. Yeah, all investors have to do it. But if you’re a SWF, you’re competing with the best and brightest in trying to uncover the Microsoft or Google of today. On the infrastructure side, you’re competing against other pensions and SWFs…better odds!

  3. 3 Rien Huizer January 13, 2011 at 5:05 pm

    Fair enough, Ashby, You are an investment optimist (believe in the human genius to create abnormally high returns) and an agency optimist (you believe agents -to include pension fund boards and managers- will not expropriate as much of the retruns as they can lay their hands on without incurring severe enough penalties).

    I guess the long term view makes sense when we are talking about assets with inherently different risk profiles (my example of the toll road was not entirely frivolous), not when you perceive risk on the basis of the current paradigm where normal distributions and high levels of continuity and liquidity are necessary to keep the thing mathematically tractable, and without tractability, you are in the domain of gambling, where my kind belongs..

  4. 4 Ashby Monk January 13, 2011 at 7:37 pm

    It’s funny, I myself rarely engage in “stock picking”. I’m still operating under my old professor Burton Malkiel’s logic for my own (small) portfolio. But where I see an opportunity is for these big funds, where their scale and time horizon DO give them an advantage over saps like me.

    Anyway, I’ll be the first to tell you the pension governance is, for the most part, pretty bad. But public pensions have very interesting agency issues…a topic for which Gordon and I have just about completed a new paper. Watch this space…

  1. 1 Investment Strategies for Long-Term Giants « Oxford SWF Project Trackback on January 20, 2011 at 9:19 am
  2. 2 SWFs ♥ Infrastructure « Oxford SWF Project Trackback on March 9, 2011 at 10:45 am
  3. 3 Sovereign Fund Distractions « Oxford SWF Project Trackback on July 14, 2011 at 3:24 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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