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Norway's SWF Worried About Inflation?
aiCIO reports, Norway's SWF Seeks Real Estate, Flees Bonds:
In
a move to combat rising inflation, Norway's Government Pension Fund
Global, valued at $548 billion at the end of last year, is slashing its
bond holdings and shifting to real estate.
The
move reflects efforts by Norway's government-run oil fund, the world's
second-largest sovereign-wealth fund, to increasingly invest in real
estate, infrastructure and other assets that have been viewed as hedges
against inflation. The decision also reflects the improvement of real
estate since the financial downturn.
"We
had about a 40% drop in property valuations from its peak in 2007 to
the bottom of the cycle which occurred in the beginning of 2010,"
Mercer's Allison Yager told aiCIO. "Since then, investors have
returned to the real estate market and made sizable commitments, but
there's no way to know if we'll ever return to the pre-crisis peak."
While
the Norwegian fund has traditionally had 60% of its assets in stocks
and 40% in bonds, it now seeks a roughly 5% allocation to real estate
and plans on lowering its fixed-income exposure by the same percentage.
The fund's first real estate investment was announced in November
2010.
The sovereign wealth fund
aims to initially concentrate its real estate portfolio on Europe.
"It's quite possible that we will increase real estate as a portion of
the fund when we reach the 5% target," Yngve Slyngstad, chief executive
of Norges Bank Investment Management, the unit of Norway's central
bank that manages the fund, told The Wall Street Journal. Furthermore, Slyngstad indicated that the fund is eyeing infrastructure.
A recent report by Prequin
further illuminates the growing attractiveness of real estate among
institutional investors. According to a report issued by the firm
earlier this month, there has been an increase in the proportion of
sovereign wealth funds investing in real estate and private equity –
51% to 56%, and 55% to 59% respectively. Separate findings by Credit
Suisse reveal that bond investors should expect less robust returns in the years ahead.
According to its report, bond investors can’t expect bonds to
outperform forever. The authors found that bond investors should not
expect returns for the next 11 years to be as strong as those of the
previous 11 years, largely as a result of rising inflation.
Last
week, the Norwegian fund revealed in its annual report that it
returned 9.6% in 2010, fueled by gains in global stock and bond
markets. Its equity holdings achieved a return of 13.3% last year,
while bonds gained 4.1%. The positive returns marked the fund's fifth
best performing year ever.
Drew Carter of Pension & Investments reports, Norway fund returns 9.6%, assets up 16.6% in 2010:
Government
Pension Fund-Global, Oslo, returned 9.6% on investments in 2010,
driven primarily by rising worldwide stock market values, the sovereign
wealth fund reported on Friday.
Assets rose to 3.077 trillion Norwegian kroner ($552 billion) as of Dec. 31, up 16.6% from a year earlier.
The fund’s equity portfolio returned 13.3%, while bonds returned 4.1%.
The
2010 performance topped that of its custom benchmark by 1.1 percentage
points. In 2009, the fund outperformed its benchmark by 4.1 percentage
points.Equities and bonds outperformed their respective benchmarks by 0.7 and 1.5 percentage points in 2010.
Equities
and bonds made up 61.5% and 38.5% of total assets, respectively, vs.
62.4% for equities and 37.6% for bonds a year before. During 2010, 85%
of cash inflows to the fund were invested in bonds to bring the mix
closer to its target allocation of 60% equities, 35% to 40% bonds and up
to 5% real estate. The fund’s first investment in real estate, a new
asset class added in 2010, is expected to close this spring.
Inflows
from the government’s sale of petroleum resources further boosted
assets at the fund by 182 billion kroner, up from 169 billion kroner in
inflows a year earlier.
Chris Panteli of Global Pensions added that this was the fund's fifth highest return ever:
The
264bn kroner return marks the fund's fifth best performing year ever,
said Norges Bank Investment Management (NBIM), which manages the fund.Equity
holdings returned 13.3% over the year, measured in international
currency, while fixed-income investments returned 4.1%. The overall
return was 1.1 percentage points higher than the return on the fund's
benchmark indices.
"In a year marked by
the European sovereign debt crisis and fears of an economic slowdown
in Europe, the fund posted its fifth-highest result ever," said NBIM
chief executive officer Yngve Slyngstad.
"Globally, stocks and
bonds gained last year, helped by improving company profits, low
interest rates and stimulus measures from the European Central Bank,
the Bank of Japan and the US Federal Reserve. The fund also benefitted
from its long-term approach, as large equity purchases during the
financial crisis in 2008 and in the first half of 2009 yielded solid
returns. The value of our fixed-income investments also continued to
recover after steep price drops two years earlier."
The
fund's best-performing stock sector was basic materials, followed by
the industrial and consumer goods sectors. The biggest-gaining stock
investments, measured in krone returns, were food company Nestlé, Apple
and oil producer Royal Dutch Shell. The weakest performers were Banco
Santander of Spain, oil company BP and Banco Bilbao Vizcaya Argentaria
of Spain.
The fund held shares in 8,496 companies and 8,659 bonds
from 1,686 issuers at the end of 2010. Equity investments accounted
for 61.5% of the fund's investments, while fixed-income investments
made up 38.5%.
The fund's first real estate investment was
announced in November 2010 as part of its strategy to exploit the
fund's long-term investment outlook.
The market value of the
fund rose 437bn kroner to 3,077bn kroner at the end of the year.
Capital inflows from the government amounted to 182bn kroner in 2010.
Finally, LingLing Wei of the WSJ reports, Norway's Sovereign Fund Moves to Cut Bond Position:
Norway's
government-run oil fund, the world's second-largest sovereign-wealth
fund, is cutting its bond holdings and shifting its investments to real
estate to protect itself against rising inflation.
The
Government Pension Fund Global, valued at nearly 3.1 trillion
Norwegian kroner ($548 billion) at the end of last year, historically
has invested 60% of its assets in stocks and 40% in bonds. It now aims
to gradually invest as much as 5% of its assets in real estate while
reducing its fixed-income investments by the same percentage.
Yngve Slyngstad, chief executive of Norges Bank
Investment Management, the unit of Norway's central bank that manages
the fund, said it will take time to build up the fund's real-estate
portfolio, which initially will focus on Europe. "It's quite possible
that we will increase real estate as a portion of the fund when we reach
the 5% target," Mr. Slyngstad said in an interview.
He
also said the fund is looking at infrastructure as well, which
typically includes toll roads, airports and other assets that produce a
steady stream of income over long periods of time.
The fund's
move comes as a growing number of sovereign-wealth funds and state-run
pension plans are rejiggering their portfolios to protect against
inflation, analysts say. These megafunds, among the world's largest
investors, increasingly are looking to invest in real estate,
infrastructure and other assets that traditionally have been viewed as
hedges against inflation.
According
to a study by data tracker Preqin of 59 active sovereign funds, the
number of these funds investing in property has increased to 56% at the
beginning of this year from 51% last year, and the number of them
investing in infrastructure has jumped to 61% from 47%.
Real
estate and infrastructure have historically performed better than bonds
in extended periods of rising prices. That is because inflation
usually leads to rising interest rates, which cut the value of bonds
because interest payments are fixed. Rents tend to rise in times of
inflation. Infrastructure contracts also often include provisions for
inflation adjustments.
Inflation concerns stem from growing
budget deficits and loose monetary policies in developed countries and
rising demand in developing markets. On Friday, China, which is
fighting inflation, raised banks' reserve requirements for the third
time this year.
"Investors globally are concerned about
inflationary pressures arising out of significant monetary injections
by central banks," said Zubaid Ahmad, global head of sovereign-wealth
funds at Citigroup Inc.
Funds
eyeing property investments also include South Korea's National
Pension Service, with more than $250 billion in assets, and China's
$300 billion state-run fund, China Investment Corp.
In recent
years, countries from the oil-rich United Arab Emirates and Norway to
big exporters like China have been funneling oil revenues or trade
surpluses into wealth funds rather than government securities in a bid
to seek higher returns. Assets managed by these state-run funds now
total about $4 trillion, led by the $630 billion Abu Dhabi Investment
Authority, the world's largest fund, according to Preqin.
The
Norwegian fund draws its capital primarily from the country's oil
sales. It returned 9.6% in 2010, driven by gains in global stock and
bond markets, according to the fund's annual report released on Friday.
Its equity holdings scored a return of 13.3% last year, while bonds
gained 4.1%.
The fund is expected to
close its first property deal by the end of this month—a £452 million
($745 million) investment in some 113 office and retail properties on
London's Regent Street, one of the city's busiest shopping areas.
As
the fund invests globally, it has extensive investments in foreign
currencies including euros, pounds, dollars and yen. A slightly
stronger kroner reduced the fund's market value by 8 billion kroner last
year.
Mr. Slyngstad said the fund also is reshaping its
"currency composition and duration of bond holdings" as part of its
efforts to protect against inflation.
You can read more on the fund's 2010 performance on NBIM's website.
The big question is whether the Norwegian fund and other large global
mega funds are right to be worried about inflation, getting out of bonds
and investing billions into real estate, infrastructure and other
alternative asset classes including commodities. I'm not so sure. There
is inflation in emerging markets stoked by the Fed's QE policy and now seems like the perfect time for funds like CPPIB to buy up US real estate. But the idea that we're headed towards some major stagflationary episode just doesn't sit well with me.
When
I was in Albany, NY this weekend, I had a drink at the hotel bar and
asked the bartender what he thinks of the US economy. The chef overheard
our conversation and joined in. The television was showing images of
the US military planes bombarding Libya. The bartender looked at me and
said: "I wish we stopped worrying so much about what's going on outside
our country and started worrying a lot more about what's going on here.
There is a lot of unemployment, people are hurting and all Democrats
and Republicans are doing is squabbling among each other." The chef
nodded in agreement as if to say it's not getting better.
As I was leaving the hotel room, PBS was playing a special with financial expert Suzie Orman, The Money Class.
I'm not a big fan of these so-called financial experts but she's pretty
decent at offering good advice (but she's also dispensed some bad
advice too!). Anyways, I listened to some pretty sad stories but one in
particular got to me. Some middle-aged man called Larry, lost his job,
went back to school to complete his Masters and now owes more than
$120,000 in student loans. This poor man is earning a little more than
$20,000 a year. He's never going to get out of debt!
And there are millions of people like Larry out there, indebted up to
their eyeballs, living paycheck to paycheck. I guess you can say
inflation will help banks and the government inflate away their debt,
but for regular hard working folks, after they're done paying the rent,
buying groceries, gas and clothes, they won't be saving much to pay off
their debts. All this to say that while inflation remains a concern as
the Fed keeps printing and emerging markets overheat, I'm not willing to
proclaim the end of the bond bull market. Not by a long shot.
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Why is the norwegian govt pissing away its citizens' money on worthless US paper? Spend it on something else.
Our money (whatever currency) ARE WORTHLESS US PAPERS. Just take a look on reserve decomposition of your country's central bank.
Go long on young arab stallions...?
Norwegian Krone is a stunner of a currency - fiat yes but should be part of everyone's diversified safe harbour portfolio....double digit current account surplus and less than 5 million people
I'm going to find me a rich norwegian wife...who likes mediterranean style cooking and baking in the sun by my side.
In a move to combat rising inflation, Norway's Government Pension Fund Global, valued at $548 billion at the end of last year, is slashing its bond holdings and shifting to real estate and infrastructure...
... just in time to watch both collapse ...and their pension fund assets collapse.
Bankers / brokers are so much smarter than govt pension fund managers ...or govt anything managers for that matter.
Add (hyper)inflation to that scenario and future pension checks might buy a happy meal.
There is simply no way pension funds (and pension checks) are going to grow fast enough to keep up with (accelerating) currency debasement.
This applies to all savings of any nature denominated in a nation's currency, 401k, IRA, govt pensions, bank CDs, savings accounts, whatever.
The sole exception might be China's currency ...particularly after it becomes the new world reserve currency.
But it really doesn't matter since pension funds will be confiscated eventually.
"I guess you can say inflation will help them inflate away their debt, but after they're done paying the rent, buying groceries, gas and clothes, they won't be saving much to pay off their debts."
Inflation is never a positive thing for Joe Sixpack, it's a great thing for banks and financial institutions that don't have to spend 50% of their capital cost on input materials(because they don't have any)
If you're an average person after what the government takes away from you which will be between 40-60% from what's left you will spend 30-60% on basic living expenses(house, children, food, transportation, etc.) you might be left with 0-15% of discretionary spending left, if inflation kicks up 5% a year and your wages rise no more than 2-3% you will be out of discretionary very quickly than all that's left is downsizing and reduced standard of living, which has been happening for the past 3 decades only the stock market bubbles where mitigating the effect a little but now there's nothing left to buffer the shock of creeping inflation to the middle class and the retired
In a few years Americas will wake up to a dramatically lower living standard and no way out
You will have finally dug a hole deep enough to reach bottom
@Azannoth,
My bad, you are right and I edited my comment:
''And there are millions of people like Larry out there, indebted up to their eyeballs, living paycheck to paycheck. I guess you can say inflation will help banks and the government inflate away their debt, but for regular hard working folks, after they're done paying the rent, buying groceries, gas and clothes, they won't be saving much to pay off their debts. All this to say that while inflation remains a concern as the Fed keeps printing and emerging markets overheat, I'm not willing to proclaim the end of the bond bull market. Not by a long shot.''
Inflation is hitting Hawaii, maybe Obama will pay attention now.
http://www.youtube.com/watch?v=s4o7RAYmYXs&feature=player_embedded
moving from bonds to real estate ? WTF !!!
What could possibly go wrong?
this is bull, the only problem we have is that we have more money than is good for us
sorry this should be a reply to a previos poster
if i remember correctly, this Norges SWF had rushed into equity just before the 2008 massacre. Their timing was auful, and it seems that they yet again got it wrong this time.
My financial advisor can help them out,his name is Ben, hes a big shot at the fed, he'll set you up with some fine instruments backed by the full faith and security of the US Gooberment! yea, yea, thats the ticket!
Quote of the Decade: From Richard Russell in tonight's update (and it capsulizes this entire rally of the March 2009 Crash Lows):
"Dow and the Transports both up triple digits. With $100 billion a month being pumped into the system, where else are stocks going to go?"
Long live Zimbabwe...
It's happening in Canada as well Leo. CPP, 401k's, Social Security don't mean fuck all if the check you are getting doesn't cover a ten pound of flour and toothpaste.
If you notice Norway has hit the same road block Canada did in 2005, the how to expand problem.
I am doubtful that anything will be left in any public pension system in five years with inflation eating away at the value of any currency being printed.