NBIM needs no introduction. As the world’s biggest sovereign wealth fund, the $1.3 trillion fund manages the country’s oil assets on behalf of the Norwegian people, and is one of the most influential global investors – accounting for an estimated 1.5% of all the world’s listed companies. The fund occupies an unusual position with just one single owner, the Norwegian Ministry of Finance – or indeed five million individual stakeholders, if you count its public position owned by the people of Norway – which gives it a uniquely long-term perspective… and informs a uniquely P&L-driven investment strategy.
“We’re extremely long term – as long term as they come – and our target audience is literally future generations. So we have very little by way of the unexpected when it comes to in and out flows,” explains Norberg. “We have one owner and a huge, long-only balance sheet – all these characteristics make us a little different.
“We don’t have to spend time on marketing ourselves or reporting to clients, so we can spend all our time on making investment decisions, which is of course an advantage. Then we have a very stable allocation, so we don’t need to worry about inflows, outflows, reallocations, or clients withdrawing funds, which gives us stronger positioning. Most firms need to keep their positions much more liquid than we do. We don’t have attribute our flows back to different accounts for every single trade and that makes a huge difference because it allows us to look at what’s best for the fund overall. Then our centralised trading desk means we can have an actual P&L on the trading desk, and it all goes back into one pool without needing to be segregated under multiple different funds, which is a significant advantage.”
Specialising for profit
Leading a team based in Singapore, Oslo, London and New York, Malin Norberg took over management of the fund’s global fixed income trading in January 2021, from her previous position as head of EM debt trading. Upon her hire, the trading team split into two teams: equity and fixed income. The fixed income team – which covers everything from credit to FX to emerging markets – is now up to 17, consisting of 14 traders (including Norberg), two quantitative analysts and one technology hire.
“We used to be more generalist, and regional,” says Norberg. “Everyone used to trade a little bit of everything, but about six years ago we split into specialist teams, and now each team focuses on a specific area. Every trader is a specialist in the asset classes they trade, and they partner very closely with their portfolio managers to understand how to get liquidity even in the most challenging conditions.
“We’re sitting back-to-back with our portfolio managers. We work very closely with them and we generate ideas in daily morning calls – but we’re also very autonomous in the sense that we have full responsibility for execution in the market. For example, we have internal risk pricing books where if a portfolio manager wants to do something in the secondary market in terms of FX or credit, they just send in the order and it gets priced up and executed immediately (from the perspective of their portfolios) , and the trading desk takes over that responsibility for execution in the market.
“That means we own the risk and P&L of the position , and it means the PM usually gets a better price than they would have, for that type of size. It allows the trading desk to manage risk much more efficiently, more like a portfolio position rather than just standalone positions. So we can hedge it, we can offset risks that we can cross, and that’s a pretty unique set-up.
“In addition, we have our own liquidity provisioning portfolios where we can take positions on short-term dislocations in the market, along with elements that wouldn’t really fit into the PM portfolios. Structuring the desk like this makes it much more than just an execution desk, it actually becomes a profit centre for the fund.
“And for the traders, of course, it’s a much more interesting position to be in – when you have your own portfolios, you’re constantly looking at the opportunities in the market and you always make sure you know what’s going on. So you have a grasp on liquidity conditions, you stay in contact with your counterparties and even when it may not be a very active period for the fund, by doing this, you’re always prepared for the next big trend.”
The importance of integration
Based in Oslo but with a background in technology as a systems analyst and with a stint in New York as a fixed income trader also under her belt, Norberg has used the past few years to good effect in terms of integrating the technology function within the team and extending its analytical function to improve decision-making.
“Technology is no longer a support function, it’s an integrated part of the way we operate,” stresses Norberg. “Earlier this year, the people working on analytics became part of our team. There is a team of developers also now devoted to our business area. They sit next to us in the office, and we work closely together. A key objective of mine is to better integrate analytics and data into our decision-making in order to be smarter about how we trade.
“The technology space is definitely a challenge for us. There is so much happening in the technology landscape and it takes an effort to be on top of the developments in this area. We’ve been focusing our efforts on building in-house tools that combine our proprietary data with external sources to provide us unique insights, and we’re really trying to streamline our processes. For example, primary auctions are something we’re spending a lot of time on, consolidating all of our information into one place enriching data with historical selections and analytics, which keeps the PMs and traders informed and in a position to make better investment decisions.
“We currently have a number of gaps to fill in our PMS/PMS setup for fixed income. Some years ago we used BlackRock’s Aladdin, which was a good all-round system. Now, however, we’ve adopted the Longview system from Linedata that our equity traders use, and we’re trying to fill the gaps by building in-house. We did a project a year ago where we looked at fixed income EMS systems, but we couldn’t find any that were mature enough to actually do the work we needed. What we don’t have yet is electronic connectivity and straight-through processing for all products, and this is one of the important topics we are trying to address.
Size and speed
“For us, the biggest technology trend that we are making use of is data offered and consumed via API’s – or directly via platforms like Snowflake Marketplace. Datasets for analytics and decision making have become much more widely available, coupled with modern software development and cloud services we can develop solutions in a much more timely and efficient manner without massive implementation projects. This reduces the threshold for assessing new products and solutions. We also see willingness from the buy- and sell-side partnering up with technology companies to build new solutions and streamline processes.
“It all makes for better opportunities, and for more cost-efficient and scalable solutions. What that means for us is that external data becomes available faster, and that can be used for analytics, automation and rule-based routing. Our traditional system portfolio is still there, but we are now working to try to present one single interface where everything from investment research to execution can take place. That reduces real estate used by traders and provides more analytical input directly into their decision-making process.
Doom and gloom
“Having said that, fixed income data is nothing but a challenge. We are a strong proponent of well-functioning markets as we believe that that’s going to benefit our investments in these markets, which we intend to be in for a very long time. Hence we’re very positive to initiatives bringing more transparency to the market, such as the consolidated tape. That’s going to help the trading environment as well as the capital markets in Europe – we envision it as a low-cost utility, that should be available to everyone and bring the same transparency to all market participants. It will be important to have a proper governance structure around that with market participants weighing in on decisions as to how it is set up. The ultimate goal should be to have as much transparency around prices as possible, available as soon as possible.
“We’ve been working closely with Ediphy on their journey, giving them advice on set-up and how we envision a tape should look like. It’s also worth mentioning that ideally, we’d have the tape joint between Europe and the UK instead of two different transparency regimes, which will fragment liquidity. There’s no upside in having numerous different regimes. If it’s a consolidated tape, it should be consolidated.
Market movements
“Another big challenge is of course the volatility and illiquidity in the current market, which seems to be here to stay. It’s a unique environment that we haven’t seen in a long time, and with the current quantitative tightening and rising rate environment we can see that many of the strategies that have worked up till now on both portfolio management and trading are now behaving very differently in this new rate environment. It has become more challenging to move size, especially in markets that were already quite illiquid to begin with. In certain emerging markets, for example, liquidity in cash bonds has completely dried up. Dysfunctioning markets have also made it more difficult to make money on relative value type of trades as dislocations tend to persist for longer.
“Up until now we’ve been almost wholly invested in cash bonds. Over the past couple of years, however, we have put in place more use of derivatives, such as interest rate swaps in emerging markets, to be able to manage risk more efficiently. We’re definitely not moving away from cash bonds, which our still our main business, but derivatives are allowing us to take more active risk-taking and shift positioning faster and more cheaply . In certain emerging markets, you can manage the risk more efficiently with interest rate swaps, for example, or taking quicker bets on our hedging risk where we can’t buy or sell quick enough.
World view
“More than ever, it’s impossible to trade this market without having a macro view, so it’s interesting to see how much broader our morning discussions are becoming compared to a few years ago. Before we’d talk about things more directly related to our markets – now it’s German gas prices, water levels in the Rhine and pork prices in China.
As fixed income markets see increased volatility however, the opportunities are also improving – for those who can take advantage of them.
“Of course, we are very excited that people are starting to care about fixed income again. The asset class is becoming more attractive to invest in now that there are higher interest rates. However a lot of the flow into fixed income these days seem to be going into similar positioning. When there are lots of like-minded positions the flow tends to go the same way – people are buying the same bonds and creating more rapid price movements in those bonds, which is not always rational. These days it also feels like it’s being conducted in a lot of small clips through portfolio trades or other protocols. That can be a good chance to capture liquidity, but it does require you to have the appropriate set-up in terms of technology and staffing, so not everyone can take advantage of that.
Relationships matter
“We’ve actually managed quite well in terms of liquidity, and our hand is seldom forced. We have the luxury of rarely having to rush it too much. But we’ve always been very conscious about having good relationships with our brokers – being friendly investors, and partnering up with them on large trades instead of just pushing through our own trades. This relationship becomes even more important as liquidity dries up: so coming back to my original point, having traders who are in tune with the market and their counterparties has been invaluable.
“One key advantage for us however, especially in terms of large trades, is that we’re not bound by best execution. Best execution for us, because we only have one owner, is about what’s best for the fund, long-term, not about trying to push every single trade as far as we can.
“With the set-up that we have and the relationships we have, we’ve evolved to becoming more of a liquidity provider than a liquidity taker. And our most successful counterparty relationships are with those who put some effort into getting to know us and understanding how we operate. Since they’re taking less risk on the sell-side, what tends to happen is that they get shown a block where maybe they can’t take the entire size, so they show it to us and ask if we want to partner with them.
“We have the autonomy on our desk to take that kind of risk ourselves – we don’t have to go back to our PM, we can make those decisions straight away and that’s been working out very well for us.”