One of the world's largest sovereign wealth funds, and one which ironically amassed the overwhelming majority of their wealth via rich oil reserves, is now looking to sell off some $35 billion worth of energy stocks. According to central bank Deputy Governor Egil Matsen, the move is intended simply to "spread the risks for the state's wealth," but one has to wonder whether the owner of 1.5% of the world's stocks has decided that oil has now moved into a period of secular decline. Per Bloomberg:
Norway’s $1 trillion sovereign wealth fund proposed dumping about $35 billion in oil and gas stocks, including Royal Dutch Shell Plc andExxon Mobil Corp., to protect the economy of western Europe’s biggest petroleum producer.
The nation will be “less vulnerable” to a drop in oil by not being invested in stocks of companies in the industry, the Oslo-based fund said Thursday. The Finance Ministry said it would study the plan and decide at the earliest in “autumn 2018.”
“Our perspective here is to spread the risks for the state’s wealth,” Egil Matsen, the deputy governor at the central bank in charge of overseeing the fund, said in an interview in Oslo Thursday. “We can do that better by not adding oil price risk through the fund.”
While the fund says the plan isn’t based on any view on the future of oil prices or the industry, it will likely add pressure on oil producers, already struggling in a world where renewable energy is gaining sway.
In light of this news, here is a list of Norway's 10 largest energy holdings (valuesin NOK) that you should probably look to lighten up on at some point before they do.
Of course, roughly a year ago we scoffed at the wealth fund's decision to respond to sinking returns and withdrawals required to fund budget deficits, deficits created by tumbling oil prices, by allocating another $130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns." (see: Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash). The extra equity purchases pushed the fund's total equity allocation to a staggering 70% of their $860 billion in assets under management.
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 70 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.”
Alas, with global equity bubbles becoming ever more bubblier with each passing day, the bet on equities paid off 'bigly' for Norway and pushed their AUM to over $1 trillion for the first time ever back in September. Per Bloomberg:
Norway’s sovereign wealth fund hit $1 trillion for the first time on Tuesday, driven higher by climbing stock markets and a weaker U.S. dollar.
The milestone valuation was reached for the first time on Sept. 19 at 2:01 a.m. in Oslo, Norges Bank Investment Management said in a statement on Tuesday.
“I don’t think anyone expected the fund to ever reach $1 trillion when the first transfer of oil revenue was made in May 1996,” Yngve Slyngstad, chief executive officer of the fund, said in the statement. “Reaching $1 trillion is a milestone, and the growth in the fund’s market value has been stunning.”
So, what say you? Is this just a logical diversification play for a state that is already highly levered to oil or is Norway signaling that the end is near for their black gold.