Norges Bank Investment Management should be granted greater freedom to invest the assets of Norway’s oil fund, starting with real estate, according to an extensive review of its active management.

The review, conducted by Andrew Ang of Columbia Business School, Michael Brandt of Duke University and the former president and chief executive of the Canada Pension Plan Investment Board (CPPIB), David Denison, was commissioned by the Norwegian government late last year and proposed that the NOK5.1trn (€630bn) Government Pension Fund Global shift to an opportunity cost model of active management.

The approach, employed by CPPIB and Singaporean sovereign fund GIC, requires the asset owner to set a reference portfolio while granting the asset manager greater flexibility to invest in a way to “provide superior risk-adjusted returns”.

The paper urged the adoption of the opportunity cost model “and corresponding delegation framework” that would see Norway’s Finance Ministry, as ultimate asset owner, set out specific terms and reference portfolios.

“This can be done in a staged process over several years, and should initially be implemented in the fund’s real estate programme,” it said.

Ang noted that, where CPPIB had long been active in the illiquid investment market, GPFG had only in the last few years launched its real estate programme.

“Where CPPIB excels, it has an integrated, comprehensive framework for thinking about the investment process for complex illiquid assets,” he said.

“Eventually, the Norwegian fund should also have these in scale in their portfolio, and CPPIB has very good structure for thinking about alternatives. That structure is very simple. It is really ‘What are these alternatives giving us we can’t access in passive, low-cost equity and bond markets?’”

He also stressed that NBIM was very successful in keeping management costs low, at around 10 basis points.

Explaining their thinking in the paper, the authors said: “For example, any dollar that could be invested in private real estate is benchmarked against the opportunity costs of investing that dollar in a mix of public equities and bonds.

“Thus, any active investment that deviates from the reference portfolio is benchmarked net of fees against public market securities in the reference portfolio used to fund that investment.”

Asked if NBIM should consider setting up a dedicated manager devoted to its illiquid investments, as Canadian pension funds such as the CAD65bn (€44bn) Ontario Municipal Employees Retirement System has done with the launch of Borealis Infrastructure, Ang said the matter was secondary.

He said: “There is a bigger question behind there, which is ‘What are the sources of the premiums we should be harvesting?’ and ‘Are they appropriate for us?’ Then you can decide how best to implement that.”

Ang said NBIM was currently limited to investing only 5% of the GPFG’s assets in real estate – although the fund’s property exposure only stood at 1.2% at the end of March – and that it was therefore important to question why a 5% limit was imposed, and why it was not allowed to increase further.

He said it was important to consider the benefits of property compared with equities and bonds.

“That’s where I think the Canada framework really helps,” he said. “It says ‘We are doing the funky, sexy illiquid investment X because we can’t get it in equities and bonds’.”