Norway oil fund opposes $70bn "Glenstrata" deal, amid allegations of passivity

3rd September 2012 by The Harried House Hunter

Even as Norwegian sovereign wealth fund throws its weight behind attempts to block the merger of commodities trader Glencore and mining company Xstrata, experts are claiming the fund has more in common with a giant passive, or index-tracking, fund than with truly activist investors.

Norges Bank Investment Management, which manages Norway’s $600bn Government Pension Fund-Global, has bought $500m worth of Xstrata shares in the open market in recent weeks, according to the Financial Times.

The move mirrors an earlier move by its fellow sovereign wealth fund, Qatar Holding, and attempts of activist investment group Knight Vinke, to block the $70bn natural resources marriage. According to the FT’s Javier Blas, the “buying spree by the two sovereign wealth funds gives Qatar and Norway de facto veto power in the tie-up.

The Norwegian fund has become Xtrata’s fourth-largest shareholder – behind Glencore, Qatar and BlackRock – with a 2.97% stake, up from 1.72% in June. The Norwegian fund’s buying spree came after NBIM privately informed Xstrata and Glencore it was unhappy with the terms of their merger.

Baar, Switzerland-based Glencore is currently offering 2.8 of its own shares for each one of Xstrata’s, but the deal’s opponents believe this seriously undervalues Xtrata. Qatar Holding surprised observers in June by saying a ratio of 3.25-to-one would be “more appropriate”. The distance between what Glencore is prepared to offer and what deal critics want it to offer, suggest the “Glenstrata” merger may be doomed to fail.

South African-born Ivan Glasenberg, chief executive of Glencore, and Mick Davis, chief executive of Xstrata, have just two weeks to get their nuptials back on the road, ahead of a vote of Xstrata shareholders on September 7. However, Glasenberg  said last week that Glencore would rather walk away than raise its offer.

The Norwegian SWF’s intervention seems to fly in the face of allegations of passivity. In an earlier article that analyzed the fund in depth, the Financial Times’ Nordic correspondent Richard Milne wrote:

A striking report, commissioned by the Norwegian government after the financial crisis, concluded the fund was little more than a passive investor. It found that, statistically, active management had “an almost trivially small impact on the overall risk of the fund” and stated that “to a first approximation, the fund is actually not an actively managed portfolio”.

Similarly, Ashby Monk, research director at Stanford University in the US, says:

“In a way, it resembles a giant index fund.”

Norway‘s SWF, whose current asset allocation is roughly 60% shares, 40% bonds and a tiny percentage in property, has shown a willingness to go against the flow in terms of asset allocation. In March, Norway‘s finance ministry said the fund would reduce its European exposure, whilst raising investments in emerging markets and Asia-Pacific.

Of the fund’s $600bn bond, fixed income and property portfolio, Reuters reported that thee proportion allocated to Europe would drop from 54% to 41%, the Asia-Pacific portion would rise to from 11% to 19%. The fund is also seeking to implement a counter-cyclical approach that could help global markets at times of extreme stress.

“The fund can exploit [its nature as a long-term investor] by being a provider of liquidity in periods when there is a lack of liquidity,” said Pål Haugerud, head of asset management in Norway’s finance ministry, which sets the investment strategy for the fund (source: interview by the FT’s Richard Milne).

The oil fund takes umbrage at suggestions it is anything other than an active investor.

“We clearly think it’s not possible to call it passive investing,” Yngve Slyngstad, the fund’s chief executive told Milne.

Personally I would be surprised if allegations of passivity are justified, but am willing to acknowledge that, as the fund gets bigger (it started with $300m in 1996 but is forecast to reach $1 trillion next decade), its agility may suffer.

Further reading on Norway and sovereign wealth funds:

This blog post was originally published on QFinance by Ian Fraser.

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