Norway’s $1.4 Trillion Wealth Fund That Humiliates The World
Jason 0 Comments Retire Wealthy
INTRO:
Have you ever wondered why social security is absolute garbage? Every year, they collect 12.4% of everybody’s
income up to $18,000. Yet, they’re projected to fall short of
their payouts by 2034. Some people blame it on the pandemic, others
blame it on bureaucracy, and others suggest that it’s simply a side effect of people
living longer than ever before. While all of these are valid points, none
of these is the fundamental problem with social security. You see, the fundamental problem with social
security is that it generates no real wealth. In 2021, Social Security pulled in $1.118
trillion in income. But $1.001 trillion of that was from contributions
and $41 billion was from income taxes charged on benefits. Social security only generated $76 billion
in investment-based income which is a measly 2.61% annual return. Given that that barely keeps up with long-term
inflation if that, it’s no wonder why Social Security is trash when it comes to creating
real wealth.
Now, you don’t actually have to worry about
social security running out because I’m sure they’re gonna either increase the tax
rate, decrease benefits, and/or print money to make up the deficit. But, what if there’s a better solution. What if instead of investing in low-yielding
bonds, social security invested in the stock market, real estate, and energy not just in
the US but internationally. This would generate true returns for social
security, and they would not be nearly as dependent on contributions. At first glance, this might sound riskier
and it is, but this is exactly what sovereign wealth funds around the world have been doing
for decades.
And the most successful fund of them all is
Norway’s Sovereign Wealth Fund also known as the Oil Fund. As of December 2021, the Norwegian Fund boasted
a total of $1.4 trillion worth of assets. To put that in perspective, Social Security
only controls $2.9 trillion despite the population being 61 times larger. On a per-capita basis, Social Security has
$8,825 worth of assets per person. Meanwhile, Norway boasts a whopping $260,271
worth of assets per person. Norway literally has over a quarter-million
dollars worth of assets per person. Now, I’ve been picking on Social Security
thus far, but really, Norway blows the rest of the world out of the water as well.
China’s wealth fund, for example, controls
$1.1 trillion worth of net assets. But compared to their population, that’s
not even $1000 per person. So, here’s how Norway built the most successful
sovereign wealth fund in history. HISTORY:
Taking a look back, the history of Norway’s wealth fund dates back to the year 1960 when
Norway’s prime minister Einar Gerhardsen got Norway involved in the oil business. He gave oil companies from around the world
licenses to come and search for oil within Norway.
Oil companies were allowed to keep the profits
they generated, but they had to pay petroleum taxes and leases to Norway to continue operations. It took a couple of years to get the ball
rolling but starting in 1966, oil companies flooded in looking for oil. Within the next 4 years, they drilled 37 wells,
and on the day before Christmas Eve in 1969, they struck oil in the North Sea in an oil
field called Ekofisk. This turned out to be the largest oil field
ever found at sea, and by 1971, oil production would begin. It didn’t take long for Norway to start
raking in loads of money, and soon enough, they started to discuss what to do with the
money.
This was not a fast process by any means as
it would drag on for 12 years, but eventually, in 1983, they came to a consensus. They decided to create a fund that could invest
the profits generated from the oil industry hence the name oil fund. The best part was that the government was
only allowed to spend real returns which are the returns after accounting for inflation. This seems like a no-brainer, but it’s not
nearly as common in application. We can’t give Norway too much praise though
given that their government was just as slow as the rest of the world.
It wasn’t till 1990 that Norway actually
went ahead and created the fund, and it wasn’t till 1996 that the fund received its first
cash injection from the Ministry of Finance. It took 36 years to get to this point, but
at least they did it, and now, it was time to invest. INVESTMENTS:
One of the hardest parts of running a successful investment fund is effectively investing all
the capital. Even investing moguls like Warren Buffett
struggle with this issue. Norway also fell into this trap early on and
they would end up investing all of the money into government bonds. But, fortunately, just one year later, they
diversified heavily into equities. Norway approved for 40% of the fund’s capital
to be invested into equities, and they gave Norges Bank Investment Management the responsibility
of investing the money.
Within just 6 months, the bank converted all
40% into equities, and with that, they were booming. In 2000, Norway approved the fund to diversify
into 5 emerging markets, so Norges had a pretty broad set of choices when it came to investments. But this didn’t mean that they could just
invest in anything. There are 4 main categories that are blacklisted
from the fund for various reasons. First of all, the fund is not allowed to invest
in any weapon production companies like Boeing, Airbus, and Lockheed Martin. Secondly, the fund is not allowed to invest
in any tobacco companies. Thirdly, the fund is not allowed to invest
in any companies that cause environmental damage. This one is a bit ironic given that all the
money is the fund originated from oil, but I guess they’re limiting their environmental
impact as much as possible.
Anyway, the last major category the fund is
not allowed to invest in is companies that are notorious for human rights violations. Fun fact, Walmart was blacklisted for this
reason till 2019. With all these guidelines, Norway was chugging
along through the 2000s quite strongly, but then the 2008 financial recession rolled around. In just one year, the fund lost 23.31% or
nearly a quarter of all their investments. Many people in this situation would panic
and sell all their stocks, but Norway wasn’t concerned.
In fact, they were excited and optimistic
to buy the dip. In 2007, Norway increased the fund’s allocation
to equities from 40% to 60%. And in 2008, they created a 5% allocation
for real estate. Honestly, they couldn’t have played this
any better. They brilliantly bought up the bottom of the
market, and they have been rewarded extremely well. In 2009, the fund posted a 25.6% return and
the fund has grown 5x since the recession. Today, the fund boasts an annualized return
of 6.56% since inception which is a bit lower than the S&P 500 7-8% annual. But, the Oil Fund is 18 times as diversified
as the S&P 500 with stakes in 9,123 companies spread across 73 countries. At the end of every year, Norway reveals all
of its stakes in a massive 400-page document. It would take forever to go through all these,
but just skimming over the most notable ones, they have $21 billion in Apple, $17 billion
in Microsoft, $7.8 billion in Facebook, and $14.5 billion in Amazon. Considering all this, I don’t think you’d
be surprised to hear that the Oil Fund is the largest stock owner in Europe. And given how strategically they’ve played
the market so far, I think they more than deserve that title.
WITHDRAWALS:
Having all that money is great and all, but what’s the point if you can’t spend it. As we previously touched on, Norway is allowed
to withdraw real returns from the fund every year, but Norway didn’t even do this till
2016 when they made their first withdrawal. Since the 1990s, Norway has averaged about
2% inflation per year, so this would mean that Norway is allowed to withdraw about 4.5%
per year because that’s their real annual return.
But they don’t even allow for that. Norway limits its withdrawals to 3% per year
which is very similar to the 4% rule with the S&P 500. The rule goes that if you withdraw 4% or less
every year from an investment into the S&P 500, you’ll never run out of money. So, it’s again quite smart that Norway has
limited withdrawals to 3%. After all, you don’t want to kill the golden
goose. When the country needs money though, Norway
doesn’t hesitate to take out the full 3%. In 2020, for example, Norway withdrew $37
billion from the fund to battle the pandemic.
Anyway, looking forward, Norway predicts that
the worst-case scenario for the fund in 2030 is $455 billion and that the best-case scenario
is $3.3 trillion. If the best-case scenario plays out, the Oil
Fund would overtake social security in assets in the second half of this decade. And at that rate, the fund would have $1 million
per citizen by 2040. Having said that, there’s no question that
the Oil Fund is a massive success financially. But, critics argue that the fund isn’t nearly
as successful when it comes to ethics.
ETHICAL CONCERNS:
Probably the biggest criticism against the Oil Fund is that all of its contributions
are derived from oil. But the truth is if Norway didn’t take advantage
of the demand for oil, someone else would’ve filled the gap. Over the past 60 years, it simply wasn’t
feasible to produce renewable energy on such a large scale. So, if Norway avoided oil, it’s not like
customers would’ve switched to renewable energy. They would’ve just gone to Saudi Arabia
or Canada for oil, and these countries have plenty of oil to make up for the disparity.
So, personally, I don’t believe that Norway
did anything unethical by leveraging its resources or the demand for oil. Another major criticism against the fund is
that their ethical boundaries aren’t enough. As a country, many argue that they have the
responsibility of being a good role model and supporting productive businesses only. One of the industries that critics argue the
fund shouldn’t be involved in is gambling and betting. This has actually been an ongoing issue for
many years now, and Norway has taken steps to ban investments in casinos.
But so far, nothing concrete has taken place,
and the fund invested into Draftkings as recently as March of 2021. And finally, the third biggest criticism against
the fund is that it’s controlled by Norges bank. Norges bank basically has full control of
the fund, and as long as they don’t break any guidelines, they can do whatever they
want. The bank does have 500 well-qualified financial
professionals, but at the end of the day, final investment decisions are left to just
17 finance ministry bureaucrats. When the fund had less than $100 billion,
this wasn’t a very big concern. But now that the fund is reaching into the
trillions, these guys have substantial financial power.
They could use this power to prop up their
own investments and/or manipulate the markets. Aside from having a lot of power, many argue
that these leaders aren’t actually that great when it comes to investing and that
hiring better leaders would lead to far better returns. While all of these points are fair, I don’t
think you can complain too much given how well the fund is performing in comparison
to the rest of the world. APPLICATION TO THE US:
Given how successful the sovereign wealth fund has been for Norway, would it be possible
to apply such a system to the US? Well, some states in the US already have a
sovereign wealth fund like Alaska. The Alaska Permanent Fund was created back
in 1976, and similar to the Oil Fund, the Permanent Fund is made possible through oil
revenue. As of 2021, the fund had $81.9 billion worth
of assets, and they disperse roughly $1600 per year per resident.
So, clearly, such a concept is not foreign
to the US; however, it would be quite difficult to create a national sovereign fund especially
if it was funded using contributions. Here’s the thing, while such a program would
be extremely helpful to people with bad spending habits and little to no investments, it’s
not all that helpful for disciplined savers and investors. At the end of the day, such a fund is just
going to match the market if that.
So, many would far prefer to just do that
themselves. If such a fund was created though, it wouldn’t
be all that hard to manage logistically. For example, if half of Social Securities’
reserves were converted into a wealth fund, that would entail investing about $1.5 trillion. While that’s a large amount, it’s quite
manageable within the financial world. After all, BlackRock has nearly $10 trillion
under management. So, creating such a fund would definitely
be more of a political issue than a logistical issue.
Personally, I’d be a fan of converting Social
Security into a wealth fund given that any sort of return would be better than Social
Security’s 0% real returns. But that’s just what I think. Would you guys support a sovereign wealth
fund? Comment that down below. Also, drop a like if you’re a fan of Norway’s
wealth fund. And of course, consider joining our discord
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