Norway’s Sovereign Wealth Fund Reduces exposure to stocks

By Filipe R. Costa.

Norway is sitting on one of the greatest financial assets ever assembled for such a small nation; the Norwegian Sovereign Wealth Fund worth £500billion. This guarantees that every citizen of that country is set to receive about £100,000 from the government pension fund on retirement. This contrasts greatly with most other European countries, perhaps most notably Greece. Where the Norwegians can look forward to a windfall when they get older, the Greeks are saddled with about £25,000 of debt each, even after the various haircuts and whatnot that halved this amount over the last few years! 

Unsurprisingly Norway’s Sovereign Wealth Fund (NSWF) is the world’s largest managed fund. It is more than five times larger than Ray Dalio’s Bridgewater hedge fund and currently owns the equivalent of 1.2% of every listed stock on the planet. There is no other investment vehicle like it.

The NSWF was founded in 1996 with the aim of investing the proceeds of Norway’s oil sales to build a secure future for the country, once the oil runs dry. It was also designed to help counter-balance price volatility for crude. Apart from oil sales, which account for 67% of the funding, the NSWF is also funded from tax revenues and oil exploration license fees.

When the NSWF was first set up, the Ministry of Finance imposed a limitation on the fund that it could hold no more than 40% of its assets in stocks. In 2009 this limit was raised to 60%. When the Financial Crisis hit, the NSWF was badly affected, losing almost £70billion. However, this also created a generational buying opportunity as corporate valuations were driven into the ground. Thanks to the increased proportion of stocks the NSWF was allowed to own, it quickly regained the losses it had incurred. In fact, the timing of the change couldn’t have been much better!

By 2012 the NSWF recorded its second best performance ever. During the last quarter of this year its gains remained substantial, as its equity holdings rose 7.6% in value, fixed income rose 0.3% and real estate was up by 4.1%. Overall the Norwegians have demonstrated themselves to be as canny with their investments as they are wise.

And as it turns out, they aren’t currently so bullish on stock markets.

After the losses they experienced in the Financial Crisis, the Norwegians are understandably concerned of getting caught out by another bubble. While their approach is very much geared towards the long term, they are conscious of avoiding short term liabilities.

With this in mind Yngve Slyngstar, chief executive officer of Norges Bank Investment Management stated the fund is reducing its exposure to stocks by not reinvesting any income earned from dividends, back into the market. It looks like the Norwegians are planning to park the money they have invested and wait for the next significant pullback before buying again.

Regarding its bond portfolio, the NSWF recently moved from a market weighting approach to a GDP weighting one. This looks like an extremely prudent step, as certain nations fall further and further into debt. Even so, Slyngstar recently said in an interview “we consider US Treasuries one of the safest investments you can do, and these last few weeks have not changed that view in any way.”

However, something doesn’t quite add up about this statement. In spite of their public utterances, the actions of the Norwegians look far more telling. Their change in method for weighting their bond portfolio means they must be reducing their exposure to US Treasuries. After all (as we keep on saying over and over) the American debt-to-GDP ratio is over 104% and rising. So, although Slyngstar’s words have helped preserve America’s credit ratings, his actions are not exactly consistent with his comments.