Norway plans sovereign wealth fund management shift as returns diminish

17 Feb 17

Significant changes to the operation of the world’s largest sovereign wealth fund have been outlined in proposals from the Norwegian government.


Norway oil rig

Norway's sovereign wealth fund, filled with the country's oil cash, is the biggest in the world in terms of assets under management.


Norway’s finance ministry announced yesterday that it would submit plans to increase the ability of the country’s Global Government Pension Fund – the biggest sovereign wealth fund in the world in terms of assets under management – to invest in stocks to 70% of its portfolio.

Amid ultra-low interest rates, the fund has struggled to generate returns from its fixed-income securities like bonds. At the same time, the collapse in global oil prices has forced the Norwegian government to dip into the fund to finance its spending and bolster the economy. 

Oil cash from the $900bn fund now accounts for about 20% of Norway’s budget and equals around 8% of GDP. Last year saw the fund make its first loss, worth $10bn, as a result – a number that is expected to increase this year.

Oystein Olsen, governor of Norway’s central bank, which oversees the fund, warned yesterday about the risks of dipping into the fund’s money.

The government’s announcement addressed this issue, revising the limit on the amount it can spend from the fund to 3% of its value, from 4% today.

However this will make little immediate difference, as spending from the fund has hovered around that point anyway.

Norway’s government is also proposing increasing the share of equity in the fund’s portfolio from 62.5% to 70% – a move that will boost the fund’s profits.

“The expected return on equities exceeds that of bonds, thus supporting the aim of increasing the fund’s purchasing power,” finance minister Siv Jensen said in a statement.

“A prerequisite for increasing the equity share is broad political support, and the ability to adhere to the chosen investment strategy also in periods of market turbulence.”

He added, however, that at the same time, investments in equity carry higher risks, as stocks are more volatile than other markets.

Jensen said this risk was “acceptable” and dealt with by revising the anticipated rate of return for the fund down by 1%.

Norwegian prime minister Erna Solberg said the proposals will “support a continued, responsible management of the considerable oil and gas resources” Norway has at its disposal.

“Norway has been fortunate, but the petroleum wealth has also been managed well,” she continued. “The proposed changes strengthen the fiscal framework we have for managing petroleum revenues.

“This will help ensure future generations may also benefit from these revenues.”

The proposals, which have been in the works since last year, will be put before Norway’s parliament at the end of March. 

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