Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash

Tyler Durden's picture

After being forced to withdraw at least $15 billion to fund 2017 budget deficits, the $860 billion Norwegian sovereign wealth fund has announced that it will change it's portfolio allocations to try to make up the difference.  The change will result in 75% of the fund's capital being allocated to global equities, up from the current 60%.  Sure, because funneling another $130 billion to the global equity bubble is just the prudent thing to do for an extra 40bps of "expected average annual real returns."

The central bank’s board, which oversees the fund, on Thursday recommended an increase in the equity share to 75 percent from 60 percent. That will raise the expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent, respectively, under the current setup.


The world’s largest sovereign wealth fund said that it expects an annual return of only 0.25 percent on bonds over the next decade and that the expected “equity risk premium,” or return on stocks over government bonds, will be just 3 percentage points in a cautious estimate.


“In our analyses, this is clearly evident in global data: internationally, growth in firms’ cash flows and equity returns are correlated with growth in the global economy,” Deputy Governor Egil Matsen said in a speech Thursday in Oslo. “Global economic growth in the coming years is expected to be below its historical level. This ‘pessimism’ is partly related to the driving forces behind the low level of the real interest rate.”

Of course, the decision comes after the fund has been forced to withdraw capital over the past two years to fund budget deficits that are expected to reach over 8% of GDP.



The withdrawals accelerated just as the heavily oil-dependent economy of Norway started to absorb the impact of lower oil prices.



In a previous interview with Bloomberg, Egil Matsen, the Deputy Governor at Norway’s Central Bank, said the withdrawals were starting to impact the manner in which the fund manages its risk profile.   

"Relevant for how we think about the risk-bearing capacity of the fund.  Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?

But Finance Minister Siv Jensen dismissed criticism of the withdrawals saying that the administration is using the fund as was intended noting that withdrawals remain below the fund's annual return target of 4%.   

“Now that we are in an extraordinary situation, hit by the biggest oil price shock in 30 years, it would be crazy if we didn’t have an expansionary fiscal policy,” she told Bloomberg. Jensen rejected suggestions that the fund was “vulnerable.” She described it as “rock solid.”


The fund’s managers have warned it’s getting harder to live up to a real return target of 4 percent. It has returned 3.44 percent over the past 10 years. For now, planned withdrawals aren’t big enough to force the fund to sell assets. It estimates income from dividends, real estate and bonds will reach 207.5 billion kroner next year, almost double the amount the government plans to withdraw.

Meanwhile, as Norway admits that it expects "average annual real returns of 2.5 percent over 10 years," in the U.S., we just wrote about how the largest pension fund, CalPERS, is struggling with whether it's long-term return targets should be 7.5% or 6%.  Sure, good luck with that.

In just a couple of months, the largest pension fund in the United States, the California Public Employees' Retirement System (CalPERS), will have to decide whether they'll rely on sound financial judgement and math to set their rate of return expectations going forward or whether they'll cave to political pressure to maintain artificially high return hurdles that they'll never meet but help to maintain their ponzi scheme a little longer.  The decision faced by CALPERS is whether their long-term assumed rate of return on assets should be lowered from the current 7.5% down to a more reasonable 6%.


As pointed out by Pensions & Investments, the decision has far-reaching consequences.  First, a lower rate of return will equate to higher contribution levels for municipalities throughout California, many of which are on the verge of bankruptcy already.  Second, given that CALPERS is the largest pension fund in the United States, a move to lower return hurdles could set a precedent that would have to be followed by other funds around the country in even worse shape (yes, we're looking at you Illinois).

While Norway is at least admitting their problem, somehow we suspect that "math/logic" will continue to lose here in the U.S...better to bury your head in the sand for a couple of more years.

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orangegeek's picture

And Norway is the cheapest place in the world to buy an electric car (goobermint subsidies) - and oil consumption is what keeps this country alive.




Socialists and their egos.

AVmaster's picture

"Eventually, Socialists run out of other peoplesmoney "

AVmaster's picture

Yea, libtards like to twist words and history to form their narrative... It's a favorite libtard tactic... 


It's getting old...

JRobby's picture

Norway about to become a labor camp.

Dec 4

Benjamin123's picture

It used to be the same in Venezuela. Nearly free gasoline and electricity from ONE hydroelectric dam.

Norwegianfish's picture

It's not really subsidies, but you don't have to pay taxes or fees on your purchase. Combine this with a large market, then you get good prices.
When you buy a $60k electric car, you get the same value for money as a $120k gasoline car due to taxes, and the numerous fees. Yes I did the math.
Not buying an electrical car in Norway today would be stupid. Ferries and toll zones are free. They even get to drive in the taxi/bus lanes lol.
Theyre gonna raise the fee on gasoline and diesel substaintially in the future to force people to buy electric cars.

I dont believe in co2 global warming, but I do care about the air I breathe.
With electrical cars you don't get the bad air quality in the cities in the winter, and thats a good enough reason for me.

Cruel Joke's picture

That's correct, the number of Teslas and Nissan Leaf you see on the roads is substantial. But consider this, ALL electricity generated comes from hydroelectric power - it makes some sense, don't you think?

SoDamnMad's picture

Bingo  You drive up to the back of the fiords in Norway and there are brand new aluminum plants running off hydroelectric power.  When you fly into airports on the western coast you see nothing but snow on the mountain tops but looking straight down you see the green valleys. That melting snow just keeps melting and melting and not single carbon tax point is paid for that electricity. Lucky

The central planners's picture

Now that equities are all time high, seem like a excellent moment to get on the train.

hooligan2009's picture

compared to peers, the expected rate of return from the Fund is low based on expected returns from global equities and bonds.

this makes sense, though the real return from bonds, as we grind into higher inflation and even more negative real yields is too high. i suggest negative real returns from bonds of -2% p.a. for the next ten years. In fact, ten year government bond yields will head towards 5-7% in the US, Europe and the UK over the next five years as credit risk and (stag)inflation are priced in. central bank rates will continue to repress investors and run at below inflation of 2-4% globally.

real estate returns will approximate -1% after inflation and (very high) costs.

global equity returns are likely to also be negative as measured by all stock indices like the MSCI.private equity will be more negatives than global equities, because of fees and costs.

i suggest that stratgeic equity investing should dominate - e.g. board representation in very 20-30 very large cap companies like BP, Sony, GE, Bayer, that themselves invest globally but which have strong, covered dividends. investments in appointing investment managers of a suite of favoured and "domestic economy" centred countries (say 7 in each of the US, slected Asia, Europe and LatAm countries) should round things off.this stratgey will outperform MSCI global equity beta by 1-3% per annum for the same risk and much lower fees than private equity and real estate.


LA_Goldbug's picture

Bring in more American War made refugees to make the Norwegians and Europe even happier. They will perk-up the economies like a bomb fire in Baghdad.

oncemore's picture

go and work hard.

or invest your money with sharks in a shark pool.

nathan1234's picture

Fools and their money are soon parted

root superuser's picture

They plan to bankrupt even the richest European countries.

venturen's picture

Well now Norway has joined OPEC...right?

Clara Tardis's picture

"expansionary fiscal policy", that is sure to secure real price discovery...

Norwegianfish's picture

I think this might be a bad idea because of risk, but might also be a good idea. The worlds biggest fund must have people that know what theyre doing.
Most of you think of this fund as a rainy day fund. It is not. We call it the states pension fund. This money is already allocated for pensions in the future, and already we know that the amount of money is short for future expenses. Guess I will have to increase my private pension savings now, or I wont be able to retire at 62 ( 27 today)

Emergency Ward's picture

If they knew what they were doing would they be where they are now?  Many otherwise brilliant techocrats lack common sense and tend to believe their own bullshit after a while.  I "Bronx cheer" them for buying MOAR STAWKS at the all-time highs to boost the price of the indexes.  Good luck on your retirement.  Norway probably manages its system better than most other countries.  But there's always room to fuck up.

Spungo's picture

"3.5 percent over 30 years,"

Is this a joke? If you proposed a real estate deal with a 3.5% cap rate, people would laugh at you. That's a horrendous return. I won't even buy something if the dividend/distribution is less than 5%.

thethirdcoast's picture

Buyng at the peak?

And I always thought the Norse were much more intelligent than the Swedes or Danes.

fbazzrea's picture

abandoning the proverbial frying pan for the fire?

not going to be pretty...

gigaweb's picture

Grammar police:  "change it's portfolio allocations" should be "change its portfolio allocations".  "It's" always and ever stands for "it is" and never a possessive of "it."