Norway’s $660 billion sovereign wealth fund, the world’s largest, returned 4.7 percent last quarter as global stock markets recovered after central banks from the U.S. to Japan stepped up efforts to stimulate growth.
The Government Pension Fund Global gained 167 billion kroner ($29.3 billion) in the period, Oslo-based Norges Bank Investment Management said in a statement today. That compares with a decline of 2.2 percent in the second quarter. Equity holdings returned 6.5 percent last quarter, while bonds gained 2.2 percent. Real estate investments returned 2.7 percent.
“The result was largely driven by a rally in global stock markets,” Yngve Slyngstad, chief executive officer of NBIM, which manages the fund, said in a statement. “Stocks gained the most in Europe, where the fund has about half of its shareholdings.”
Stocks rose after European Central Bank Governor Mario Draghi in July pledged to do “whatever it takes” to save the euro and later unveiled a bond buying program to bring down interest rates. The U.S. Federal Reserve announced a third round of quantitative easing to stimulate the world’s largest economy, adding to investor optimism.
The MSCI World Index of stocks rose 6 percent in the third quarter, while the benchmark Stoxx Europe 600 Index has rallied 17 percent from a June 4 low. Asian stocks also gained in the third quarter amid stimulus measures from Japan to China.
Europe’s largest stock investor, which gets its capital from Norway’s oil revenue, is struggling to meet a 4 percent return target after interest rates plunged to record lows and global stock markets failed to retrace a 2007 peak.
“We’ve had a good return on our bond portfolio the last few years, but we currently have a yield of just above 2 percent,” Slyngstad said in an interview today. “With that premise, the return you can expect in the next few years will of course be at best moderate.”
Norway’s government deposited 80 billion kroner of oil revenue into the fund in the quarter. The fund’s result missed by 0.03 percentage point the benchmark set by the Finance Ministry.
“Two thirds of our bond portfolio now has a running yield of less than 2 percent, and only a quarter has a running yield of more than 3 percent,” Slyngstad said in the interview. “In that context, for the owners of the fund to expect us to deliver a higher return to the extent it has been in the bond market the last decade is not realistic.”
At the end of September, the fund held 60.3 percent of its assets in stocks, 39.4 percent in bonds and 0.3 percent in real estate. The fund, which gets its investment guidelines from the Finance Ministry, is mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate. While the investor mostly follows global indexes, it has some leeway to stray from those benchmarks.
The fund’s largest stock holding at the end of the quarter was Nestle SA, while its biggest bond holding was U.S. Treasuries, followed by Japan and U.K. government debt.
“We do see good yields in the equity markets and lower yields in the fixed-income market,” Slyngstad said.
Holdings of French government bonds fell 17 percent to 58.9 billion kroner in the quarter, while investments in U.S. and Japanese government debt increased 9 percent and 10 percent, respectively, the fund said.
At the same time, the fund increased it holdings of debt denominated in emerging market currencies to 8 percent of its fixed-income portfolio, from 1.5 percent at the end of last year. Mexican government debt became the investor’s 10th-largest fixed income holding, at 19.8 billion kroner.
“The changes reflect a strategy to gradually reduce the fund’s share of European bonds while increasing bond investments in other regions,” the investor said in a press release.
The fund is also increasing its holdings in covered bonds, which are considered safer and get high credit rations, while cutting down on senior debt issued by European banks as tougher regulations pressure lenders.
“As an investor, we have increased our portion of covered bonds in our portfolio and reduced our portion of senior debt,” Slyngstad said in the interview. “We think this is something that will continue for quite a few years.”
The fund, which has an average holding of 1 percent of the world’s listed companies, has been taking on more risk as it adds asset classes such as real estate. It’s also expanding in emerging markets while retooling its bond portfolio to a gross domestic product weighting from a market weighting to avoid nations with growing debt burdens. The fund is moving asset allocation away from Europe as emerging markets in Asia and South America gain a bigger share of global output.
Slyngstad told reporters that the fund was half-way through the process of reallocating its assets.
The fund got its first capital infusion in 1996 and has been taking on more risk as it expands globally, raising its stock portfolio to 60 percent from 40 percent in 2007. It first added equities in 1998 and emerging markets in 2000. In 2010, it got approval to invest as much as 5 percent in real estate. It has since bought commercial property in London, Paris, Frankfurt, Berlin and Sheffield in the U.K.
Norway, Europe’s second-largest oil and gas exporter, 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, the country’s largest energy company. The oil fund invests outside Norway to avoid stoking domestic inflation.
-- With assistance by Stephen Treloar and Alastair Reed in Oslo. Editors: Jonas Bergman, Tasneem Brogger.