Norway’s oil fund has raised its holdings in equities to a record level as the world’s largest sovereign wealth fund continues to demonstrate its dislike of bond markets. Norway Fund Says Emerging Market Slump Curbed Returns

Last updated: August 9, 2013 12:04 pm

Norwegian oil fund raises equity holdings

By Richard Milne in Oslo

Norway’s oil fund has raised its holdings in equities to a record level as the world’s largest sovereign wealth fund continues to demonstrate its dislike of bond markets. Equities accounted for 63.4 per cent of the fund at the end of the second quarter while bonds represented just 35.7 per cent, a record low. “I have said before it is less a reflection of enthusiasm for the equity markets and more a lack of enthusiasm for the bond markets,” said Yngve Slyngstad, chief executive of the $760bn oil fund.The oil fund – which is managed by a part of the Norwegian central bank – has been wary of openly criticising the policy of quantitative easing used especially in the US, UK and Japan but has signalled its unease with the consequences by reducing its holdings of government bonds.

In the second quarter, the fund slashed its exposure to French and UK debt by almost a third as part of its move to reduce holdings in Europe.

Overall, the oil fund returned just 0.1 per cent in the quarter with equities up 0.9 per cent and bonds losing 1.4 per cent.

The fund is allowed by Norway’s finance ministry to have 50-70 per cent of its assets in equities and its previous record was 62.6 per cent at the start of 2010. But if its benchmark portfolio were to hit 64 per cent there is an automatic rebalancing of the benchmark to 60 per cent, providing an effective ceiling for its equity ownership.

Norwegian politicians, ahead of next month’s elections, and the oil fund have been grappling with the consequences of its fast growing size that means it owns 1.25 per cent on average of every global company.

The Conservatives, seen by opinion polls as the likely winners, have proposed a debate on whether to split up the fund.

Mr Slyngstad said that any changes would be up to politicians as the representatives of the Norwegian people, who he said were the ultimate owners of the fund.

However, he added that there was no management reason to break the fund up.

“In Europe we have seen that we can easily live with an average ownership of 2.5 per cent and that would not be a challenge in the rest of the world either. So there’s plenty of room from a pure management and investment purpose without incurring any issues,” Mr Slyngstad told the Financial Times.

The oil fund also confirmed that it would set up a corporate governance advisory board to further its move towards becoming a more active investor, first revealed by the Financial Times.

Tony Watson, John Kay and Peter Montagnon – three British corporate governance and financial experts – will make up the board that will be used for advice on director appointments at single companies as well as a sounding board for general ownership issues.

Norway Fund Says Emerging Market Slump Curbed Returns

Norway’s sovereign wealth fund, the world’s largest, said a slump in emerging markets held back returns in the second quarter amid concern over a slowdown in the Chinese economy.

The fund lost 5.9 percent on its stock investments in emerging markets in the second quarter, in part because of speculation of weaker growth in China, the investor said. In total, the $760 billion fund rose 0.1 percent, or 17 billion kroner ($2.9 billion), in the period, helped by U.S. and Japanese stocks. Stocks rose 0.9 percent, while bond investments dropped 1.4 percent. Real estate investments rose 3.9 percent.

“Equity returns were boosted by a strong market in the U.S. and Japan, while emerging markets pulled in the other direction,” said Yngve Slyngstad, the fund’s chief executive officer. “Fixed-income returns were undermined by rising global yields.”

The investor, which posted its second-best year in 2012, is undergoing a shift in strategy to capture more global growth. It is moving asset allocation away from Europe as emerging markets in Asia and South American gain a bigger share of global output. The fund said 10 percent of its equity portfolio was invested in emerging markets.

Value Erased

Emerging market equities and bonds slid in the period, and about $4.2 trillion was erased from the value of global equities over a month after Federal Reserve Chairman Ben S. Bernanke in May signaled that policy makers could pare stimulus should the world’s largest economy show sustained improvement. The MSCI Emerging Markets Index slumped 9 percent in the second quarter.

Europe’s biggest equity investor, which gets its guidelines from the government, held 63.4 percent in stocks in the period, up from 62.4 percent in the first quarter. Its bond holdings slid to 35.7 percent from 36.7 percent of the fund while real estate comprised 0.9 percent. It’s mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate, while allowing for fluctuations. The fund mostly follows global indexes and has some leeway to stray from those benchmarks.

The fund’s largest stock holding at the end of the quarter was in Nestle SA. (NESN) The largest bond holding was in U.S. Treasuries.

The Money

Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company. Norway is western Europe’s largest oil and gas producer. The fund, which has an average holding of about 1.2 percent of the world’s listed companies, invests abroad to avoid stoking domestic inflation.

The government deposited 58 billion kroner of petroleum revenue into the fund in the second quarter. The return exceeded by 0.3 percentage point the benchmark set by the Finance Ministry.

The fund may need to be restructured to help boost returns, according to Conservative Party leader Erna Solberg, who most polls suggest will replace Jens Stoltenberg as prime minister after Sept. 9 elections.

The investor got its first capital infusion in 1996 and has been taking on more risk as it expands globally. It first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.

To contact the reporter on this story: Saleha Mohsin in Oslo at smohsin2@bloomberg.net

Norway’s Fund Lost 2% on Government Bonds Amid Japanese Slump

By Emma Charlton – Aug 9, 2013

Norway’s sovereign wealth fund, the world’s largest, said it lost 2 percent on its government bond holdings in the second quarter as the value of its Japanese securities and inflation-linked debt declined.

“The rise in yields meant that most fixed-income sectors produced a negative return for the quarter,” the fund said in a statement today. “Uncertainty in fixed-income markets also increased.”

The $760 billion Government Pension Fund Global said its Treasuries lost 1 percent in the period, while Japan’s government bondsslumped 5.9 percent. Inflation-linked securities dropped 3.4 percent, while euro-denominated debt returned 1.6 percent, it said.

The wealth fund said government bonds made up 60.9 percent of its fixed-income investments at the end of the quarter.

“The fund increased its investments in government bonds from Japan, the U.S. and Brazil in the quarter,” the Oslo-based investor said in its statement. It “reduced its holdings of government debt from France, the U.K. and Australia,” it said.

The wealth fund also invested in securities issued by the European Financial Stability Facility, it said.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net