Why Norway's $1.4tn sovereign wealth fund is bullish on AI as inflation bites

Stock-pickers at Norway’s $1.4 trillion wealth fund expect that putting artificial intelligence to use will boost company profits, counteracting persistent price growth that continues to cause headaches for businesses and central bankers alike.

“What the reality and what the backdrop really suggests is that inflation is much harder to get down and get into a normal level for a longer period of time,” said Pedro Furtado Reis, who heads equity investments at the fund with Daniel Balthasar. On the flip side, AI is hitting the mainstream this year and "that we strongly believe is going to lead to a very pronounced efficiency and productivity gains over time, which are positive for corporate margins and for profitability of corporates overall".

The Oslo-based fund is the world’s biggest single owner of publicly traded companies, with roughly 1.5 per cent of all listed stocks worldwide. It holds 70 per cent of its investments in equities, averaging a return of 6 per cent for the past 25 years.

That level of gains is unlikely to continue in the face of rising borrowing costs and soaring inflation, chief executive Nicolai Tangen warned, with the fund last year posting its biggest loss since the 2008 financial crisis. “We remain quite cautious,” Mr Furtado Reis said.

While headline inflation may drop, food inflation remains “stubbornly high and continues to hurt household disposable income", he said.

Droughts and heatwaves associated with climate change are also affecting crops such as olives, he added. "That has a negative impact on corporate margins as a whole, on the health of the consumer and will have an economic growth impact as a result.”

The fund — which invests according to a strict mandate from the finance ministry — seeks to make the most of its limited leeway to try to beat the benchmark against which it is measured, something it has managed in eight of the last 10 years.

“AI is also something to really be at the front of mind for the rest of the year,” Mr Furtado Reis said. “Companies are going to be questioned, people will be curious as to how ready they are, what are the opportunities they see, who are the winners, the losers. This is all so big and nascent at the same time that this is going to shape up the year, no doubt.”

With holdings in more than 9,000 companies, Norges Bank Investment Management (NBIM) is also considering putting AI to use to help it as an active shareholder.

Its managers met companies 2,911 times last year, often to discuss topics at the forefront of the fund’s agenda, such as board diversity and climate change.

“We are very privileged that we have this access,” Mr Balthasar said. “We need to be extremely well prepared for those meetings and there we can use AI to help us, so we can really focus our energy on the actual meeting.”

The wealth fund’s engagement with the companies it owns forms part of the analysis it carries out in its efforts to outperform.

Mr Tangen last week told politicians in Oslo it is becoming more and more important to put resources into finding “rotten apples” after taking a hit on the collapse of Silicon Valley Bank.

Still, the fund “fared pretty well” through the turmoil involving US regional banks, deputy chief executive Trond Grande said on Friday, returning 5.9 per cent in a first quarter also impacted by Credit Suisse's takeover by UBS.

SVB and Credit Suisse represent “two different situations, interlinked by a key element in the banking sector, which is trust”, Mr Furtado Reis said. The SVB collapse prompted a lack of trust in the system, cutting short the Swiss bank’s time to find a solution to its problems, he said.

“You realise the type of misalignments and maturity mismatches in the piping of the financial industry that obviously has ramifications globally if it happens in many places at the same time to a significant degree,” he said. “Those types of events are really wake-up calls.”

And with NBIM’s chief executive encouraging his portfolio managers to take a contrarian approach, using such events to improve returns is critical.

“What is important for us is that we are in a position where we can learn from our mistakes and take advantage of whatever happens in the market”, building on the fund’s unique characteristics and competitive advantages, Mr Balthasar said. “One of the advantages of long-termism is that you can stomach volatility, but you still need to get the entry price right.”