As we reported late last year, the Norwegian government ordered its Sovereign Wealth Fund to increase its equity allocation to 70% to try and paper over what’s expected to be a 70 billion kroner ($11.1 billion) drawdown – the first in the fund’s history.
That money was needed to plug a budget hole created by falling oil prices, and it seems the brilliant minds at the Norwegian Ministry of Finance and the Norges Bank figured they could easily recoup the fund's losses by upping its risk exposure. Indeed, they’ve already raised the fund’s 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 previously.
Eight months later, the MoF is still planning to make the shift, which would result in it buying about $100 billion in global stocks, though prices have risen considerably in the interim. Despite the fund’s rush to raise its 10-year earnings forecast, fund officials said worries about a near-term market slump played “little part” in their investing plans," according to Bloomberg.
“Norway’s $970 billion wealth fund has been ordered to raise its stock holdings to 70 percent from 60 percent in an effort to boost returns and safeguard the country’s oil riches for future generations. Any short-term view on growing risks will play little part, according to Trond Grande, the fund’s deputy chief executive.
‘We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,’ he said in an interview after presenting second-quarter returns in Oslo on Tuesday. The decision to add stocks ‘was made at a strategic level, on a long-term expected excess return that we’re willing to take risk to achieve. And parliament has said that they wish to spend some time to phase in that increase.’”
According to data cited by Bloomberg, the fund held 65.1 percent in stocks, 32.4 percent in bonds and 2.5 percent in properties during the second quarter. Its mandate is now to keep about 70 percent in stocks, 30 percent in bonds, with about 7 percent in real estate that’s now separate from the main portfolio.
However, Grande says he’s keeping a “close eye” on market indicators.
“It doesn’t lead to anything in concrete terms, other than the fact that we’re keeping a close eye on the indicators that could indicate whether there’s a risk there, and what they’re saying,” Grande said. “Some risk indicators have actually not shown underlying risk -- take growth for example. So you should be a little cautious when the skies are all blue.”
While the fund has said little about its investment preferences, Bloomberg reports that the fund has recently been expanding into emerging markets.
“Owning 1.3 percent of global stocks, the Norwegian fund largely follows indexes but is allowed some active management of its portfolio. It has been expanding more into emerging markets and recently got permission to raise its stock holdings after Norway last year started withdrawing cash from the fund for the first time.”
Sovereign wealth funds have like Norway's have benefited immensely from a virtuous cycle of central bank buying. So perhaps Norges Bank Deputy Governor Egil Matsen, the official in charge of the fund’s oversight, has some special insight into the thinking of central bankers, the primary engineers of the global post-crisis market rally.
Central bankers like Thomas Jordan and his colleagues at the Swiss Central Bank, which earlier this month revealed itself as the “mystery buyer” that kept US stocks afloat during the second quarter while retail and institutional investors headed for the exits.
Whatever it is, the rest of us will have to wait to find out.