Norway’s wealth fund plans equity shift to boost returns

Norway’s sovereign wealth fund, the world’s largest, should raise the proportion of its investments in equities to 75 per cent from 60 per cent to boost returns, the central bank, which manages the fund, recommended on Thursday.

"A higher equity allocation means that the expected return on the fund will increase," central bank deputy governor Egil Matsen said in a speech.

A majority of members on a government-appointed commission last month recommended an increase of equities to 70 per cent, although the group’s chairman dissented, saying the holding should instead be cut to 50 per cent to reduce volatility. “The realised return . . . may differ considerably from expectations. In order to maintain the investment strategy over time, a good understanding and broad acceptance of this risk are essential,” Mr Matsen said.

Made up of revenues from Norway’s extensive oil and gas industry, the rainy-day fund began saving cash in 1996 to preserve wealth for future generations and protect the country’s economy from short-term swings in the oil market. The increased equity holding would boost the expected 30-year return of the fund to 3.0 per cent per year from the 2.6 per cent which was estimated if the equity allocation remained at 60 percent, said the central bank.

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On a 10-year basis the expected return would rise to 2.5 per cent per year from 2.1 per cent, it added.

The recommendation will now be sent to Norway’s finance ministry which is expected to publish a white paper on the fund’s strategy in the spring and to seek the consent of parliament. If a change was made today, it would mean the world’s largest sovereign wealth fund, currently valued at $862 billion, would move about $129 billion into equities away from government bonds, whose low interest rates drag down the fund’s return.

But any reallocation of the fund’s assets is expected to take several years. Valued at more than twice Norway’s annual gross domestic product, governments are only allowed to spend an average 4 per cent of the fund each year under the so-called fiscal spending rule, and this may be tightened even more. “Oil revenue spending should be based on a realistic estimate of expected return. At the same time, due consideration must be given to return uncertainty. It may therefore be wise to consider spending somewhat less than the expected return over time,” Mr Matsen said.

The fund can currently invest 60 per cent of its assets in equities, 35 per cent in fixed income and 5 per cent in real estate. It holds stakes in around 9,000 companies across 78 countries. It cannot invest in Norway.