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Norway Tells Largest Sovereign Wealth Fund to Buy on Dip

Norway’s $650 billion wealth fund, the world’s largest, now has to buy stocks as they slump.

The government this month codified that the fund, which goes by the official name of the Government Pension Fund Global, has to buy stocks when markets are falling as part of a strategy it calls rebalancing. The process will be triggered when the fund’s stock weighting deviates more than 4 percentage points from its 60 percent mandated level at the end of a month.

“We can stomach buying more equities in falling markets,” Paal Haugerud, head of the Finance Ministry’s asset management unit, said in an Oct. 18 interview in Oslo. “Short-term volatility is of lesser importance for a truly long-term investor.”

The move will open up for the managers of the fund, headed by Chief Executive Officer Yngve Slyngstad, to make more active choices in investing Norway’s oil wealth as the investor struggles to meet its 4 percent return target. The fund argues it can take different risks than other managers since it doesn’t have any immediate obligations and a steady inflow of capital.

Norway is also shifting the fund’s strategy to capture more global growth to safeguard the nation’s wealth. It’s moving asset allocation away from Europe as emerging markets in Asia and South America gain a bigger share of global output.

The Stoxx Europe 600 Index rose 0.6 percent to 271.15 as of 12:46 p.m. in London. The index is up 11 percent this year.

Real Returns

Norway’s wealth fund has generated a real return of 2.57 percent on average since 1998, and an average annual loss of 0.63 percent over the past five years. In the second quarter this year, the fund saw its assets decline 2.2 percent as it lost 77 billion kroner. Equity investments slipped 4.6 percent.

After losing a record 633 billion kroner following the 2008 collapse of Lehman Brothers Holdings Inc. and global market losses, the fund responded to the rout by boosting equity purchases. Transactions of 136 billion kroner at the start of 2009 helped to increase the annual return by about half a percentage point since 1998, according to the website of the central bank, which manages the fund.

In the second half of last year, the fund also bought more than 150 billion kroner in stocks as part of the strategy to invest in assets that have fallen in price.

“If you want to be a countercyclical investor, what should happen is that when equities look cheap you buy more of them,” Elroy Dimson, a professor emeritus at the London Business School and an adviser to Norway’s Finance Ministry on investment strategy, said in an interview last week. “It’s right for a large, long-horizon investor. Whether it pays off in the end depends on skill and, to some extent, on luck.”

Larger Deviation

In a Jan. 26 letter to the government, Slyngstad and central bank Governor Oeystein Olsen called for a rebalancing trigger of 3 percentage points. The ministry set a wider target because the larger deviation will result in fewer rebalancing events and “somewhat” lower costs, it said in the 2013 budget.

According to Dimson, rebalancing allows for more active management of Norway’s wealth.

The rule is “an opportunity to allow the manager to make more decisions about performance and costs,” he said. “This allows the manager to engage in active management at the asset- class level.”

The fund, which has an average holding of 1 percent of the world’s listed companies, has been taking on more risk as it expands globally, raising its stock portfolio to 60 percent from 40 percent in 2007. It added stocks in 1998, emerging markets in 2000 and real estate in 2011. The fund is mandated to hold 35 percent in bonds and 5 percent in real estate. It’s not allowed to own more than 10 percent in any individual company.

Real Returns

Norway, a nation of 5 million people, generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA (STL), the country’s largest energy company. The Nordic nation is Europe’s second-largest oil and gas exporter. The oil fund invests outside Norway to avoid stoking domestic inflation.

The fund will report third quarter results on Nov. 2.

“Rebalancing has served us well,” Hilde Singsaas, state secretary at the Finance Ministry, said in an Oct. 18 interview. “We need a rule so we don’t deviate too much from the equity portion of 60 percent. We can get a higher premium from rebalancing because we can sell when prices are high and buy when prices are low, so it has been good for the real returns.”

The rule will trigger portfolio rebalancing every other year on average, according to national budget documents.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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