Oslo: Norway’s sovereign wealth fund, which owns more than 1 per cent of global stocks, is treating its $300 billion (Dh1.1 trillion) bond portfolio as a hedge for what it now essentially views as a stock fund.
“60 to 70 per cent in equities — imagine it was 60 to 80 or 90 per cent — the whole thing is that this fund is actually to a large extent now a public equity fund,” CEO Yngve Slyngstad told reporters in Oslo. “We don’t think about this as two separate asset classes that have their distinct dynamics, the real risk of the fund is in the equity market.”
The $1 trillion Government Pension Fund Global, which started out as a pure bond portfolio before adding stocks, returned 3.2 per cent in the third quarter, or 192 billion kroner ($24 billion), the Oslo-based investor said on Friday. Equities drove returns gaining 4.3 per cent, while bonds rose 0.8 per cent and real estate investments grew 2.7 per cent.
The fund is targeting a number of changes to adjust to a world that’s been characterised by ultra low rates and unprecedented central bank liquidity for several years. It said in September it wants to cut the number of currencies in the bond index it tracks from 23 to only three: dollars, euros and pounds. That’s because the fund now sees less benefit from long-term diversification for fixed-income securities.
Norway’s Finance Ministry on Thursday demanded a more thorough explanation of how the world’s biggest wealth fund will manage the risks that might come with such changes, which include cutting emerging-market bonds and corporate debt from the index.
“The essence of this argument is not to think about fixed income in isolation, but think about how it should complement a big portion of the fund, which has this very large exposure to the equity market,” Slyngstad said on Friday. “That is how to think about the credit question, how many emerging currencies should we have.”
The fund has doubled in value over the past half decade and was this year given the go-ahead to boost its stock holdings to 70 per cent of its portfolio. Norway last year started withdrawing cash for the first time after sinking oil prices opened up holes in the budget.
Slyngstad warned in April that the fund had turned cautious after equity returns ran up over the previous 12 months. With the rally continuing, the CEO hasn’t changed his tone.
“It’s our job to be cautious,” he said in an interview in Oslo on Friday. “Whether it is very unstable or very calm, there is probably the same risk underlying in the market regardless.”
Emerging stocks, which make up 10.2 per cent of the fund’s equity holdings, returned 6.4 per cent, while US stocks, its single largest market with 35.9 per cent, returned 3.2 per cent. Oil and gas shares were the best preforming sector in the quarter with a 8.7 per cent increase as increased demand for oil, Opec’s quota discipline and lower production of shale oil in the US boosted crude prices, the fund said.
Owning close to 1.5 per cent of all large listed companies globally, the Norwegian fund largely follows indexes, but is allowed some active management of its portfolio.
Beat its benchmark
The fund held 65.9 per cent in stocks in the quarter, 31.6 per cent in bonds and 2.5 per cent in real estate. Its mandate is to keep about 70 per cent in stocks, 30 per cent in bonds, with about 7 per cent in real estate that’s now separate from the main portfolio. The fund beat its benchmark by 0.1 percentage point.
The government withdrew 10 billion kroner in the third quarter. It plans to increase withdrawals to 72 billion kroner next year.
The fund’s biggest equity investments in the quarter are Apple, Nestle and Royal Dutch Shell, while its largest fixed income holdings are US, Japanese and German government bonds.
The fund sent a new expectations document on tax and transparency to the 500 largest companies in its portfolio and participated in 45 initial public offerings in the quarter. It invested most in the Pirelli & C SpA, Landis+Gyr Group AG and Play Communications SA IPOs.