The Norwegian Oil Fund has built its investment model around academic research, broad diversification, cost efficiency and a systematic approach to investing. Many of the same principles can be applied when investing your own capital.
Connectum is the only advisory firm in Norway whose investment policy draws on the same type of research that underpins the Oil Fund’s investment model.
For anyone looking for a research-based and systematic approach to investing, the Oil Fund provides a useful point of reference. Its model shows how investment decisions can be made within a defined framework, without relying on an ability to pick winning stocks or predict where markets are heading next.
What is the Norwegian Oil Fund’s investment model based on?
The Oil Fund follows a largely index-based approach built around broad diversification and cost efficiency.
At this year’s Arendalsuka, the Fund’s investment model was discussed at an event entitled “The Oil Fund’s recipe: A new Norwegian business model?”
Espen Henriksen, Professor at BI Norwegian Business School, described how Norges Bank Investment Management (NBIM) drew on academic research when the investment framework for the Oil Fund was developed in the 1990s.
That research helped shape an approach in which investment outcomes depend less on individual managers successfully picking stocks or predicting market movements. Instead, the portfolio is built around broad market exposure, diversification and a consistent investment process.
One of the principles at the heart of this approach is time in the market rather than timing the market. Investment decisions follow a defined methodology and take a long-term perspective.
Can private investors apply the same investment principles as the Oil Fund?
The principles behind the Oil Fund’s investment philosophy can also be relevant when investing private capital.
The Reitan family came to a similar conclusion when considering how to invest its own capital. At Arendalsuka, Magnus Reitan described how the family reviewed the evidence on different approaches to investing and decided that the large majority of its portfolio should follow an index-based approach.
The Oil Fund, Reitan Kapital and an individual investor clearly operate under very different circumstances. Their objectives, time horizons and constraints are not the same. Yet the underlying investment principles can still provide a sound basis for managing very different portfolios. Connectum has built its own methodology around these same investment principles.
For an individual investor, these principles need to reflect what the capital is intended to achieve, how much risk you are able and willing to take, your time horizon and your need for liquidity.
What sets Connectum’s investment methodology apart?
Connectum is the only advisory firm in Norway whose investment policy is based on the same type of research as the Oil Fund.
Only a small number of institutions in Norway consistently apply this evidence-based, largely index-driven approach across the core of their portfolios. They include Norges Bank Investment Management, which manages the Oil Fund; Reitan Kapital, which manages the Reitan family’s capital; and Connectum Capital Management AS.
Connectum has followed this approach since the early 2000s and makes the methodology available to private clients.
Decades of academic research suggest that, for the vast majority of investors, consistently outperforming the market through manager selection and stock picking is extremely difficult. There is, however, evidence to support systematically tilting a portfolio towards certain factors. Systematic factors are characteristics of investments identified through research that can be used to adjust portfolio weights according to defined criteria. Factor tilting can therefore form part of an evidence-based investment process without changing the principles on which the overall portfolio is built.
Connectum’s view is that a systematic, evidence-based approach produces better results over time than investment decisions based primarily on individual judgement. This view is grounded in decades of academic research into manager skill, stock selection and systematic investment strategies.
How does Connectum put a research-based investment methodology into practice?
Connectum uses academic research to provide a consistent framework for investment decisions. Each portfolio is then constructed around the level of risk the client is able and willing to take.
In practice, the approach includes:
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Broad diversification, to avoid unnecessary reliance on individual investments.
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Cost efficiency, because costs have a direct impact on what the client retains over time.
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Time in the market, with investment decisions made from a long-term perspective.
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Systematic factors, where research provides a basis for tilting the portfolio towards documented investment characteristics.
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A defined investment process, so that decisions continue to follow established criteria over time.
For Connectum, investment results need to be considered in relation to risk. The objective is to construct a portfolio with the best expected return for the level of risk the client is taking. A systematic approach also provides a consistent framework for how investment decisions are made and how the portfolio is constructed over time.
Read more about how Connectum moves from understanding your situation and objectives to strategy and investment management in the Connectum model.
What does the Oil Fund’s investment philosophy mean for how you invest your own capital?
The principles behind the Oil Fund can provide a research-based foundation for building a systematic and robust investment portfolio suited to your circumstances.
For an individual investor, the approach needs to reflect what the capital is intended to achieve, how much risk you are able and willing to take, your time horizon and your need for liquidity.
The Oil Fund operates under very different circumstances from an individual investor. The relevant lessons lie in the underlying principles and investment discipline. Your investment strategy needs to reflect your own situation and what you want your capital to make possible over time.
Connectum has applied this research-based approach since the early 2000s. Investment decisions follow a defined methodology, while each portfolio is structured around the client’s objectives, risk profile and time horizon.
For investors looking for a systematic, research-based and robust way to invest their capital, Connectum offers a defined investment methodology tailored to their individual circumstances.
