Nicolai Tangen – Overseeing the Largest Sovereign Wealth Fund (EP.354)

23:44Then the risk budget is basically defined as a tracking error budget in two out of three years, how far from the index can you be? And what does that range? 1 .2%. So we are an index near fund. And I think it's really important because when a fund is this big, if we were to lose a lot of relative money, like big time, I'd lose my job, right? You don't survive that. The problem is that you are being kicked out at the worst possible time. And typically then you would liquidate the positions and crystallize losses, which shouldn't be crystallized. And that is why it's important to be close to index because the governance structure cannot survive if the leadership of the fund takes two big risks.

24:25How have you staffed the organization to go out and pursue that strategy? So first of all, I haven't staffed it myself. I've been there for three years. So we were already full of fantastic people, really brilliant people. It's a very small organization. It's roughly a third of the size of what similar institutions would be given the asset size. we are 650 people, 650 people running 1 .3 trillion. We don't have secretaries. We book our own tickets on flights. You come and visit me in Oslo. You come into my office and think, gee, I thought you guys were running a lot of money. It's really laser focus on costs.

25:03And that's important because it does something with a mindset when we are a public institution and we have to behave thereafter. And that's important. We have a large proportion, which is run close to the index. There is an active element to all the strategies we run. So even the index near funds would have different types of overlays and different types of long -term trades on. And then we have part of the pool, which we are running in a more active way. And it's important to do active asset management because it's also tied into active ownership. Because we have dialogue with the companies, we have 3 ,000 company meetings a year, we have clear expectations to how the companies should behave.

25:42We vote at the AGMs and so on. So that active part is important. When you start with your lens at AKO, which is obviously a far more concentrated portfolio, and then think about active risk in the context of the largest pool in the world, how do you decide what and how much to take that active risk? The risk -taking in this fund is very delegated. So we have a lot of people running various mandates. One of the cool things working here is that you get responsibility early. You can end up after three years to earn a billion dollars. So really great place to start because you get responsibility early and you are being trained by your colleagues.

26:23That's really important. Then we can at the leader group level also take some different types of risks. So we did, for instance, have a shorter duration than the market over the last few years. That's saved us quite a bit of money. So we can put on those type of positions as well. We don't do it very often. I think they need to be pretty fat pitches. They need to be situations where you think you are 65%, 70 % likely to be successful. So you don't see many of them. How does the composition of the 650 people on your team break down between functional roles? Yeah, first geographically, half of them would be in Oslo.

26:58We have big offices in London, New York, Singapore, some smaller offices in Paris and Tokyo. We have a real estate team. We have a large and very good fixed income team. We have equity, active research. We have the more index -like. We have more than 100 people in technology. Big effort now on AI and doing really well there. Compliance, of course. So I would say the normal functions. We're going to take a quick break in the action to tell you about SRS Aquium. Want to make sure your M &A processes aren't stuck in the past? Partner with a company that's been defining the future of dealmaking for nearly two decades instead.

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28:51and high fees is not a good thing in no way. So we need to be sure that there is significant returns after fees and that has been consistently. How have you decided to pursue that emerging market strategy? It's been a combination of things. We have a really superb team who's been doing this for a long time now. We've got a great methodology in place as a team of eight. They're doing it just like a super job, identifying the right people, staying with them for a long period on time, getting to know the investment philosophy and supporting them as organizations. Does the team have a bias for the types of external organizations you like to partner with?

29:27Small teams, small organizations, or small teams within some larger organizations. High duration relationships. We like to be important partners. So we have, in some cases, quite large parts of their AUM. I'm wondering how that math works when even 5 % of your pool is 65, $70 billion in the US. How do you invest in smaller teams and funds when you're deploying that much money into emerging markets? You know this because you've been in this business yourself. We have roughly 100 relationships, so we spread it out. I'm curious to get your sense of the differences in the depth of research that you saw when you're more focused at AKO compared to across 9 ,000 companies in your equity portfolio at the sovereign wealth fund?

30:14We do not research 9 ,000 companies. We research less than 1 ,000, but we do research them very well. Do we research them better or worse than what we did in my previous life? I think it's very difficult to compare a different type of research. How do you define those two different types of research? There are some similarities and some differences. One of the things when you come into a large organization like this, you cannot change the investment philosophy overnight. I can't say, hi guys, today we are going to start to invest in quality investing. Everything you buy should have a certain growth rate and it should have a certain return on investment.

30:50Otherwise, we don't want to buy it. Okay. So you tell that to somebody who's got a mandate and then they underperform. Now whose fault is that? That's your fault, right? It's not their fault. So you cannot do that. So people have to choose the way they invest themselves. And the philosophy in the fund has always been that there are many ways to skin the cat. You find the way that suits you and that's how you go about it. Now, and then I'm trying to get people to become even more long -term in what they do and even more focused. But in particular, the timeframe I think is very important. And I really don't like frequent trading.

31:23I think you should trade as little as you can. It's very costly to trade because of friction costs. You move prices against you and very often you add little value. And then the more decisions you take, the worse they tend to be. You make one decision per month, probably quite good. Make 10 a day, probably not quite good. When you add all this up at the asset size you are, even with taking some active risk, there's no way of getting away from being effectively a universal owner of equities. One of the things you didn't mention is the world of private markets, which has become a growing part, certainly in the developed markets of capital formation and businesses.

31:59I'm curious how you've thought about accessing that part of being a universal owner. Private equity has not been a part of the mandate we have. And we are in active conversation with the Ministry of Finance to potentially get that in. And this is a decision by the board. And we will soon make our recommendation and then we see whether we get it through the system or not. I think the arguments for doing it is that more and more the value creation takes place outside the listed market. Companies that own longer by private equity than they have been in the past, they're bigger when they get to the market and we automatically buy one and a half percent of them when they come because that's what we own of the world.

32:35So a lot of that juicing has already been done when these oranges or lemons come. And I think it's right to take part of it also because that market is growing bigger. It's getting close to 10 % of the size of the world stock markets. And I think it's pretty clear that there was some access returns there. The ESG aspects have improved. Liquidity has improved. Transparency has improved. Fees have come down through co -investments and so on. So I think there is a pretty strong argument for it. But as I said, this is not my decision. This is a decision by the board and the ministry. We have the infrastructure to cope with it.

33:05We have the sector analysts. We have the capital market specialists. We have the relationships. We have people who have picked external managers. I think we have the corporate culture for it. We have the legal framework for it. It would take very little extra people. And also, we are the only large fund in the world of our type who are not doing it. It's a bit like when you start out in competition in orienteering or whatever, right? And everybody runs in one direction and you're the only one who run in the other direction. You just have to think, do you hold your map upside down or what? You just have to consider what you're doing and that's what we're doing now.

33:39As you're waiting for the governance board to decide what happens, imagine you've thought through and mapped out how you might go execute if you did have the mandate to do so. How do you think about that deploying large sums of capital into private markets? Really good question. First of all, when is a good time to enter this market? Hey, this market is in trouble. Private equity companies are not having a good time. Fundraising is difficult. Exits are difficult. Financing is not easy. You have a lot of debt coming up to renewals. This market is not great. And I don't think it's going to be great for some time.

34:14In my mind, good time to enter potentially. It's a bit like when we increase the equity share during the financial crisis. I think this could be one of those. How do you go about entering this market? You do a combination of primary and fund funds, and you buy some secondary so that you get a good spread on managers and vintages, so that you don't take one big vintage risk or one big manager risk, but you spread it out and you build it up as a mosaic. It's pretty clear to me who are the good PE companies to be with. And it's interesting when you ask them all, who do you respect in the world? Who do you think are the best?

34:45It's the same names who come up all the time. It's fascinating. So in the EM world of your external managers, you mentioned being with smaller managers. As you've asked those questions about private equity, where does that break down in terms of size? Well, I should be a bit careful here, but there were some really good large ones and clearly some very good medium ones. All right. We'll let that sit for now. As part of this idea of universal owner, there's a whole bunch of things that you could think about in terms of making the companies that you own better. You mentioned sustainability. Your money comes from oil.

35:18We'd love to hear your thoughts on the whole ESG world and how you've applied it to the pool. It's important for us to invest in a responsible way. And that's what we do. We have, I think, the best ESG team in the world, probably. We have a framework of expectation documents we have laid out in great detail how we expect companies to behave in terms of corruption, climate, water usage, human rights, and so on. So that impacts and guides the way we expect companies to behave. It also guides the way we vote at AGMs. And we do it through conversations that we have with our companies, and we do it through the voting.

35:58We vote at 12 ,000 AGMs every year, 120 ,000 proposals. It's a big machine. We announce voting intentions five days ahead of time so that everybody in the world can see how we vote. And there are only basically two other big voting instructors, and we are in a way the third independent voice. Really fascinating. How have you thought about environmental risk? The thing is that if you're a small company with 20 companies, you can hide, but we cannot hide. If we have one company which pollutes somewhere in the world, we pick it up in the rest of the portfolio. When you are a part of the whole world, you cannot hide.

36:35So you have to care about environment. The climate is a financial risk. And when people politicize and say that climate is a political question, I just don't get it. To me, climate is as political as gravity. How do you integrate that with the stream of cash flows that come to the fund just from oil, which is one of the fossil fuel pollutants. Well, it's oil and gas, okay? And gas is still a very important part of the energy solution in Europe for the next many years. I don't think it's unethical to exploit your oil and gas resources. Not at all. It's a very important part of what makes the world tick.

37:12But we have to think long -term how we deploy that capital, and that's what we do. You mentioned wanting your team to think even longer term than they had before. How do you instill long -termism into the investment process? It's not easy because we are short -term in our thinking. Imagine that you come home and tell your partner or your partner ask you, hey, what did you do today? Nothing. Day after, nothing. Day after, nothing. Day after, nothing. It doesn't feel good. But in investing, the best thing you can do sometimes is not to do anything. So one thing which I think is interesting is inertia analysis, right?

37:46You take your January one portfolio, see how it goes if you didn't change a thing. What would have been the results? And then you look at what you actually achieved and the difference in what you have subtracted or added by going to the office every day. And you'd be surprised how often you have subtracted value by going to the office. You should have been staying on the beach. And that's a pretty humbling exercise to go through. It's tough not to do anything. I remember in my previous life, I had an investor who had a really good year and I said, do you trade a lot? They hadn't done a single thing.

38:17They hadn't changed a single position and they had a phenomenal year. So it's possible. How do you create incentive schemes on your team to try to elicit that behavior? We do have a rolling three -year way of looking at results. Is it the perfect way? No, it's probably not. And probably the incentive structure could be even more long -term. It's funny this thing with long -term because when you are young, you are in a hurry. When you are 25, one year, wow, it's such a long time. Now, when you are at my age, one year is very short, right? The closer you get to death, the more long -term you become.

38:54And that's just really intriguing. I met a guy, a Spanish guy the other day, he was like 85 and he was just planting some pistachio trees. I don't know how long time it'd take for a pistachio tree to start to bear fruit, but quite a bit of time, He was really excited about his long -term prospects for his pistachio trees, 85. Hey, that's cool. So there's an element of long -term investing comparable to where you started your career. And obviously when you have these assets that you just think of buy and hold. At the same time, you've mentioned there are instances like you're thinking about private equity now where being contrarian really can make a difference and move the needle.

39:27People are notoriously not good at market timing. So how have you developed frameworks for deciding when is the time to move off the tried and true path, maybe to take more risk or in this case, try to, if the opportunity presents itself, invest in something where everybody else is running the other way? It's a super good question. What I do is I just try to gauge greed and fear. And fear, it's relatively easy to gauge. You have the VIX index, measuring the implied volatility, but you can see it like under COVID, you saw it in the amount of news that was about COVID. You could read about the worst case scenarios.

40:06You could read to which extent the specialists disagreed on the outcomes because when specialists disagree, that's really scary. So you could see that people were incredibly afraid. We feared for our lives. That kind of fear you can measure. You can measure during the financial crisis when you have a CEO and you ask him and say, how can this possibly now turn to the better? Nikola, there is no way this can ever get right. We are doomed. There is no hope. Hey, of course there is some hope. So you just need to speak to people, you need to gauge that fear. And that's what I tend to do. And then on the other side, euphoria, much more difficult to gauge, much more difficult.

40:44But you have to just get a feel for how much champagne is flowing, how loose are credit standards, how complacent are investors. And you just have to put it into some kind of framework. That's in a way how I look at it. There's a lot of this human input and judgment that you think about that goes into these things. You mentioned in passing data science and AI and your use of it in the process. And I'm really curious how you've thought about bringing AI into this process that is predominantly a universal owner of assets. So we don't really use it to pick investments. We use it to time the deployment of capital.

41:22When we get money into the fund, we use it for that timing. And we use it also now increasingly to minimize trading. Since we are an index near fund, we can buy a Tesla on a Monday and sell it on a Friday because of index changes. And by using this type of AI models, we can reduce the amount of training and save a lot of money. That's where we deploy it for the moment mainly. Since you've come into the seat, you've probably been more public than any time in your career. And you talked about the importance of transparency. I'd love to hear how you've thought about being transparent in a different way from how the fund might have run previously?

42:01Yeah, very important. It was a relatively secretive fund in the past. And when I came in, I thought it was time to open it up. And we have opened it up internally and externally. Internally, we have a lot more internal communication going on. And internal communication is key to performance. What we see is that the organizations which perform really well, those are organizations where information travels to the people who need to know. And everybody should know as much as they can. So now internally, for instance, we publish the notes from our leader group meetings. We transcribe them, summarize them through ChatGPT, put them out on the intranet.

42:35Everybody can read what we discuss in the leader group. It's the most read thing we publish internally. That's one thing. Externally, we have opened up. We are showcasing more people. In the past, there were four people who could talk on behalf of the fund. Now 650 people can talk on behalf of the fund. We are more in media. We communicate more with the stakeholders because we see that the more knowledge you have about the fund, the more you trust the fund. And trust is completely key for a fund like this. And we were selected the most transparent fund in the world by this transparency company in Toronto called SEM this year for the first time.

43:08And we're really, really proud. It's not so easy to be transparent. So we work really hard on it, but I think it's completely key. And also the podcast we mentioned in good company is also part of this transparency. And the LinkedIn is follow me on LinkedIn as well. We publish a lot of things there. What we see is also that this drives applications for our jobs. We have, in many cases, 10 times as many applications as we had in the past. Over the last 12 months, the level of applications have doubled. So we get better applicants. And we are a relatively small company. We need the best and brightest.

43:38And so if you're a brainy person, you have to apply to us. Super happy I get all this advertising in here. Thank you a lot. I probably need to buy a beer or something afterwards. What are some of the other benefits you found from being open and transparent? I think when you are, it makes it easier to align the organization towards the same goal when you all publicly go the same way. I think it forces you to be even more honest with yourself, not to change your mind, not to have a mission drift, these kind of things. I think openness is only positive and we are as open as we can. And we even publish all of our holdings once a year.

44:12And I think probably we can do it twice a year. I don't think we can do it more often than because then you can start to gauge how we trade. And so that's not great. But apart from that, we can do it. We publish what we talk to companies about in our company meetings. Check out our website. It's incredible. When you're deploying so much capital into markets, I'm really curious what the impact of your activities ends up being on just this much smaller asset management industry in Norway. My hope is that we can be a force for good in the Norwegian asset management industry and that we can have some positive repercussions for other companies.

44:49We have an investment conference coming up in April, which I think will be the best investment conference we've ever seen in that country. We are attracting the best asset managers in the world to come and talk to us and we'll stream it so everybody can listen in 23rd of April. But we also have a very big summer program. We have taken more people than we need in our summer program. We have a big graduate program. So we try to over -educate a bit. And we have a teaching program where we teach at various universities. different type of courses, and we put our experts out there. We try to do something good there for the asset management industry generally.

45:20And it can be big. In Dublin, I think there are something like 100 ,000 people working in that industry. There are less people in Oslo. There are also, of course, different tax rules, which make it a bit more challenging to start up and so on. But I think over time, Oslo could be a pretty cool center for this because we've got different priorities than what we had in the past. I think our priorities changed during COVID. It was easier to work remotely, and we appreciate nature more than we did. In your couple of years in the seat, I'm curious how much all of the activities you've found find their way into the stories of the beneficiaries that you serve.

45:54When you think about the fact that we contribute one out of five krona into the budget, implicitly you do a lot of education budget, national health budget, all these kind of things. I do try to talk about that to the fund that, wow, we certainly have an important role in the country. I think it's one of the reasons why we get so many applications these days. People want to have a deeper sense of purpose in their lives. And this is a very clear purpose. Where do you want this to go over the next five, 10 years? That's very clear. We want to be the best large investment company in the world. How would you measure that?

46:29Performance is one. Reputation is one. Long -term thinking. Integrity. Ethics. ESG. It's a combination of things. It's also people. Do people have a good time? Do they thrive? Do they get to use their full self? Are they in the flow? A whole range of things. I'd love to ask you, maybe particularly from your podcast and Good Company, what are some of the biggest lessons you've learned from your guests? There are many ways to be a successful CEO. But the first thing that strikes me is that they work a lot, right? You just don't become a CEO by chilling all the time. You are in there. And I asked Jensen Huang of NVIDIA, how much do you work?

47:07And he said, Nikolai, there is hard work. And then there is insanely hard work. So I said, where are you? I work insanely hard. I work from five in the morning until I go to bed. I work every day. I work every Saturday, Sunday, holiday. And wow. So then I said, yeah, but when do you relax? Kevin Nicola, I relax all the time. And that's because he's got passion. And passion is the second thing. So it's hard work and then passion. These people are passionate. They love what they do. And that's why they work so hard. The third thing is grit. Why do you have grit? You have more grit if you are passionate about what you do.

47:36You can take more shit. You can take more backlashes and more resistance if you really love what you do. And then they run towards problems. They take the problems. And that's also really important. What's been your most memorable experience doing the podcast where you came off and said, wow, that's really why I wanted to do this? I get that a lot of times. It's a bit like when you meet a person and you have a meaningful conversation and you just get deep into something. That's just really fascinating. What an honor to be able to have a whole hour with some of these people. to spend an hour with Bill Gates or Jensen Huang or Sam Altman or James Gorman or you name it, that you get a whole hour with some of the most important people in the world who shape the world into what it is.

48:20And some of them help you look into the future as well. It's really fascinating. I love it. And lifelong learning is another thing that they all mention. And this is part of my lifelong learning too. I read up on these podcasts during the weekends, probably the same way as you do. All of them feel a bit like an exam. You don't want to disappoint the people who listen in. You don't want to screw it up. You don't want to come across as a fool vis -a -vis the person you interview. So it's just a really cool thing. And we have got hundreds of thousands of people who've been listening to these things.

48:47And hopefully, some people can learn some as well. How do you go about preparing to interview such a wide range of executives? I get great support from the organization. So we have sector analysts who cover the various sectors. I've got a guy called Sigur, who is helping me prepare as well, who's collating a lot of this information, and doing a tremendous job, then I have a lot of good friends in a lot of different fields and who are very clever. And I typically ask them, hey, any help here? Any good questions I should ask them? And to get this thing from different type of angles is really helpful.

49:17And then I spend time myself doing it and putting on my own thoughts. And hey, that's the way we do it. Nikolai, before I let you go, I want to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family? I would say it's nature. And I walk a lot in nature. It's good for psyche. I pick mushrooms in the autumn. I ski in the winter. I sail in the summer. Nature is where I relax. What's one fact that most people don't know about you? I do collect art. And I started 25 years ago when I did that break. So I built now what is the largest collection in the world of Nordic modernist art.

49:54I've given it to my hometown in Norway where I grew up, and they will open a museum in May, which I think will be pretty spectacular. So just buy your tickets. Another advertisement. What's your biggest pet peeve? Unnecessary red tape and bureaucracy. I like speed. I do think speed is a mindset. How have you fostered speed in a larger organization that's so important in every move you make? Super question. Speed is not necessarily a mindset in the public sector. There are different priorities. You need to be very accountable. Everything you do needs to be traceable and you need to prove that the necessary work has gone in there.

50:32And so it is a challenge, but there's also a lot of learning, right? Because when you really anchor something solidly, it makes the change easier to make because the stakeholders have been part of planning the change. And so it's easier to conduct it. And so you can operate within a bigger system, but it just takes a different way of working. That's been a great learning for me. Which two people have had the biggest impact on your professional life? I would say there's been more than two. I mentioned the one at Casano, David Croft. I would say the two people at Edgerton, John and Bill, really important.

51:04And then my colleagues at AKO were important in forming me. And then I love working with my new colleagues in the fund. What's been the happiest moment of your professional life so far? Probably when we got the first really incredible client at AKO. When you set up a fund and then And you have a world -leading investor giving you your money and trusting you with the money. And you know that you have passed the most difficult exam there is in terms of building a firm. And they have done DD left, right, and center for months. And they have checked everything. And they have therefore implicitly okayed you, the team, the organization, and the process.

51:47That is a big moment. What's the best advice you've ever received? To always go for the most difficult choice, to just always run towards the problems. I've always tried to take the most difficult way. All right, Nikolai, last one. What life lesson have you learned that you wish you knew a lot earlier in life? You are not in a hurry. You've got a lot of time. Think long term. Nikolai, thanks so much for sharing your path and the seat on top of a very large pool of assets. Thank you, Ted. Thanks for listening to the show. To learn more, hop on our website at capitalallocators .com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more.

52:34Have a good one, and see you next time.