Stockholm (HedgeNordic) – Norway’s Central Bank last week proposed to increase the amount that the Norwegian sovereign wealth fund, the Government Pension Fund Global (Statens Pensjonsfund Utland – SPU), invests in equities.
The fund (formerly the Petroleum Fund) invests Norway’s excess oil revenues in international stocks and bonds on behalf of the country’s future pensioners and, with an average holding of 1% in equities worldwide, is the world’s largest sovereign wealth fund by assets, currently valued at USD 859 billion.
The Central Bank, whose subsidiary NBIM (Norges Bank Investment Management) manages the fund, has concluded that stocks offer greater potential returns than bonds.
“In February, Norges Bank was requested to assess whether the relationship between expected return and risk for equities and bonds has changed and whether there is a reason to adjust the equity share in the fund’s benchmark index,” Egil Matsen, Deputy Governor of Norges Bank, said last Thursday in Oslo. This assessment found that investment-grade bonds have fallen sharply, while expected returns on equities over bonds are now projected to be at a higher level than at the previous assessment of equity allocation.
“Norges Bank submitted its advice to the Ministry of Finance… recommending an increase in the equity share to 75%,” Mr. Matsen said. A higher equity allocation means the expected return on the fund will increase, the bank said.
Previously wholly invested in government bonds, the investment portfolio first included equities in 1998, with the strategic equity share set at 40%. This level was increased to 60% in 2007. The fund has been composed of 60% equities and up to 5% real estate, with the remainder in bonds, since 2010.
“There is reduced covariance between bond and equity returns. In short, bonds have become a better, but also more costly, hedge against fluctuations in the fund’s value. Both of these factors suggest that some increase in the equity allocation would be appropriate,” Mr. Matsen said.
Picture: (c) shutterstock.com—Ioannis-Pantzi