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Norway Puts Biggest Wealth Fund on Review as Assets Explored

Norway will wait to see whether real estate investments by its $850 billion sovereign wealth fund pay off before considering new asset classes including infrastructure and private equity.

“Whether we do it next year or the year after, that hasn’t been decided,” Paal Bjoernestad, state secretary in charge of the fund at the Finance Ministry, said in an April 4 interview. “We will come back to it -- it’s not off the table.”

Prime Minister Erna Solberg’s Conservative-led government, in power since October, has backed away from pre-election talk of restructuring the fund and is now signaling any changes to the world’s largest sovereign investor are likely to be slow. The approach is at odds with calls from within the central bank-managed fund, which has argued in favor of a broader investment mandate to help it reach a 4 percent return target.

The fund, which owns 1.3 percent of the world’s equities, has delivered less than 4 percent on average since it started investing in the late 1990s. Central bank Governor Oeystein Olsen says it must take on more risk to raise returns. In addition to infrastructure and private equity investments, he advocates raising stock holdings to 70 percent from the current 60 percent.

The fund is allowed to hold 35 percent in bonds and 5 percent in real estate. Since being freed to expand into the property market in 2011, the asset class makes up just 1 percent of its total portfolio.

Political Scrutiny

“It’s natural to assess our experience from real estate investments before we move into more asset classes,” Bjoernestad said.

Norway, Western Europe’s biggest oil and gas producer, channels its fossil-fuel income into the wealth fund to shield the $500 billion economy from overheating. It got its first capital in 1996, added stocks in 1998, emerging markets in 2000 and real estate in 2011. The government is allowed use the targeted 4 percent return to plug budget deficits.

As Norway’s oil wealth grows, the fund has come under increased political scrutiny. It almost doubled in size since 2010 and is estimated to reach $1.2 trillion by 2020.

The previous Labor-led government rejected the fund’s pleas in 2011 to buy infrastructure and private equity, citing costs and low returns.

Formula One

The fund’s efforts to broaden its mandate have also been hampered by controversy over its investment in Formula One. Norway’s parliament is planning to conduct hearings after local media suggested the fund’s investment in the racing group ahead of a planned initial public offering overstepped its mandate. The fund can only buy private equity if the company is planning an initial public offering. Formula One’s IPO was subsequently canceled. Corruption allegations against Chief Executive Officer Bernie Ecclestone added to the controversy.

The fund is also under pressure from the opposition to cut investment in coal companies. Some lawmakers even want the fund to reduce its holdings in oil and gas producers.

In a letter released on April 4, the fund asked the government to allow it to take more risk by doubling the maximum it can deviate from its benchmark. It recommended raising the limit of relative volatility to 200 basis points from 100 basis points, in the Jan. 31 letter published on its website. The government rejected the proposal in its white paper and said it would address the issue next year.

“There has to be a balance of increased return and increased risk,” Bjoernestad said. “We have quite an aggressive strategy right now, there’s no plan to change this.”

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