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Norway Oil Fund Should Buy Europe Assets in Slump, Adviser Says

Norway’s $570 billion oil fund should take advantage of Europe’s depressed asset prices and delay a plan to cut investments in the region, said an adviser to the Finance Ministry on investment strategy.

“There’s a case to buy, particularly when others are selling,” Elroy Dimson, a professor emeritus at the London Business School and chairman of the ministry’s strategy council, said yesterday in an interview in Oslo. “That is an argument to avoid rushed rebalancing” of the regional weight, he said.

The Finance Ministry, which sets the guidelines for the wealth fund, has outlined an investment plan that targets capturing more emerging-market growth as Asia and South America make up a bigger share of the global economy. The fund last quarter slashed bond holdings in southern Europe as it moves out of countries with high debt burdens.

The fund held about 6.5 billion euros ($8.9 billion) less in peripheral European debt than its benchmark in the quarter. While it bought “significant” amount of European stocks in the third quarter, overall 49 percent of its equity portfolio was invested in Europe, below its 50 percent mandate. Its bond portfolio was 58 percent in Europe, below the 60 percent called for by its guidelines.

‘Too Late’

Norway’s Finance Ministry has come under pressure to speed up changes to the mandate and reduce European investments.

Siv Jensen, who leads the country’s largest opposition party, the Progress Party, has called for immediate action. “Addressing this in the white paper to parliament this spring is too late,” she told broadcaster NRK on Oct. 27. “The issue should be brought before parliament within a very short time.”

The fund, whose stocks lost 17 percent in the third quarter, raised its equity holdings in Europe as investors dumped stocks on concern the deepening debt crisis and slowing U.S. growth would hurt corporate profits. The fund lost 21 percent on its European stocks in the period.

“There needs to be more even weightings in different markets but it doesn’t have to happen instantaneously,” Dimson said. “If everyone is trying to sell and you are trying to sell as well, then that might not be the best time to do it.”

‘Significant’ Amounts

While the government targets a 4 percent annual real return for the fund, its managers at the central bank and overseers at the Finance Ministry argue that it should use its long-term outlook to take advantage of market declines. The fund is built from Norway’s oil and gas income to save money for future generations of Norwegians.

The fund bought “significant” amounts of stocks in the third quarter, Chief Executive Officer Yngve Slyngstad said at a presentation last month. Of the 78 billion kroner ($14 billion) in new capital it got from the government, 78 percent was placed in European stocks in the quarter, raising its holdings of the region’s stocks to 2.08 percent from 1.93 percent in the prior quarter, Bunny Nooryani, a fund spokeswoman, said in an e-mail.

The 15-year-old fund lost a record 633 billion kroner in 2008, when a financial crisis erupted following the collapse of Lehman Brothers Holding Inc. It then responded to the rout by increasing its stock holdings, helping to post a 26 percent return in 2009 and a 9.6 percent gain in 2010.

The government-appointed advisory group headed by Dimson last year said the fund should invest in riskier assets to take advantage of its long-term outlook and recommended review of the regional weights. It backed the fund’s move into real estate and said infrastructure investments “could be beneficial” while calling private-equity “challenging” because of the costs.

Global Indexes

The fund mostly buys securities by following global indexes and has leeway to stray from those benchmarks. The strategy was criticized after active management of its bond holdings contributed to record losses in in 2008. Since Jan. 1, the range by which the fund can deviate from the return benchmark it tracks was cut to 1 percentage point from 1.5 percentage points.

“The bank has used its risk limits when it has sold itself down -- or has a lower share in southern Europe than what slavishly following the index would mean,” Hilde Singsaas, a state secretary at the Finance Ministry, said in a phone interview on Nov. 1.

It’s mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate, which it first bought this year. It got its first capital infusion in 1996 and has been taking on more risk as it expands globally, raising its stock portfolio from 40 percent in 2007. It first added stocks in 1998, emerging markets in 2000 and this year real estate to boost returns and safeguard wealth.

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