Norway's Oil Fund Says Volatility Is Good as Crisis Rewards Risk Strategy

Norway’s sovereign wealth fund said it’s taking advantage of volatility to generate better returns as Europe’s largest equity investor adds risk.

“If you look at what has happened during the financial crisis, a fund like ours actually came through it quite well and that to some extent increased our risk capacity and our risk willingness,” Yngve Slyngstad, head of Norges Bank Investment Management, said yesterday in a Bloomberg Television interview. “In a 30-year horizon you are actually paid for taking volatility; volatility for us is actually a good thing.”

Norway’s $459 billion Government Pension Fund Global, the world’s second-biggest sovereign wealth fund, had a 26 percent return last year, recouping most of its record $104 billion loss in 2008. In the first half this year it snapped up bonds from Greece, Spain, Italy and Portugal. It has raised its equity share to 60 percent in the past three years from 40 percent. The fund says its long-term strategy means it can afford last quarter’s $25 billion loss.

“We went in and bought a considerable amount of equities during the crisis and I think also in the future, we’ll try to exploit the time-varying risk premium, as we call it -- being there when no-one else wants to be there,” Slyngstad said.

The fund, which wants to raise its real-estate investment to 5 percent of its total portfolio, is betting its shift toward equities will earn it more money in the long term. It held 59.6 percent in stocks and 40.4 percent in bonds at the end of June.

‘Significant Stake’

The fund has “a significant stake in equities and we’ve said that we are comfortable with that stake,” Slyngstad said.

The MSCI World Index of stocks has fallen 2.5 percent this year, after posting a 27 percent gain last year and a 42 percent loss in 2008.

The government requires the fund to keep 60 percent in stocks, 35 percent in bonds and hold as much as 5 percent in property investments. The fund, which manages Norway’s oil and gas wealth, mostly buys securities in proportion to their importance in global indexes. By using its leeway to stray from those benchmarks using active management, the fund has beaten those measures by an annual average of 0.3 percent since 1998.

Norway is the world’s second-largest gas exporter and the seventh-largest oil exporter. The oil fund invests outside the country of 4.8 million to avoid stoking domestic inflation.

Finance Minister Sigbjoern Johnsen said in an Aug. 27 interview the fund is investing for “infinity,” allowing it to take higher-risk positions in its stride. Some investors, including Pacific Investment Management Co., which runs the world’s biggest bond fund, say a bet on Greece is too risky.

‘Looks More Attractive’

“During the course of 2009, we sold more than half of our government bonds in southern Europe, so in one sense we took a negative stance on the development,” Slyngstad said. “In 2010, of course, you’ve got yields at a level that’s completely different. Therefore, it looks more attractive.”

Yields on 10-year Greek debt are trading about 9 percentage points higher than German benchmark debt, up from 1.15 points a year ago. Greek Prime Minister George Papandreou said today at a conference in Oslo his country is on target with deficit cuts after “very stringent” and “painful” measures.

Successful reforms in Europe’s most indebted countries may help spur a recovery in the region. The economy of the euro area will grow almost twice as fast this year as previously forecast, the European Commission said today. Gross domestic product in the 16-nation bloc will expand 1.7 percent instead of the 0.9 percent projected in May, the Brussels-based commission said.

Asia Growth

Half the fund’s assets are invested in Europe, “so the development in Europe is, of course, of particular interest,” said Slyngstad, who became chief executive officer at the fund in January 2008 after heading its equity investment unit. He said he now wants to boost the fund’s Asian holdings.

“We have to be where the growth is, so Asia will over time be a larger part of our investment universe,” he said. “It seems like China is the story for some time to come.”

The oil fund opened an office in Singapore this year, its second in Asia along with Shanghai. Sovereign investors including Temasek Holdings Pte and Qatar Investment Authority are boosting Asian investments as the region’s recovery outpaces the rest of the world.

Since 1998, when Norges Bank Investment Management was formed to manage the assets, the fund returned an annualized 4.33 percent through June. The Abu Dhabi Investment Authority, which manages the world’s largest wealth fund, said in its 2009 annual report it had an annualized return of 6.5 percent over the past 20 years.

The Norwegian fund’s largest stock holding at the end of June was in Nestle SA at 19.2 billion kroner, followed by HSBC Holdings Plc and Royal Dutch Shell Plc. The largest bond holdings were in U.S. government bonds, at 141.6 billion kroner, followed by U.K. and German government bonds.

To contact the reporters on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net; Meera Bhatia at mbhatia2@bloomberg.net

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