Norway’s Sovereign Wealth Fund Shuns Stocks on Reversal Bet

Norway’s sovereign wealth fund, the world’s largest, warned that stock-market gains may reverse as Europe’s biggest equity investor said it won’t use new inflows to buy more shares.

“Our share in the stock market has been stable or falling even though markets are rising, and that means in practice that we’re not using inflows to buy stocks,” Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, said at a press conference today in Oslo. The fund is preparing for a “correction” in stock prices, he said.

The warning follows a surge in stock values that added 7.6 percent to the fund’s equity portfolio last quarter. The $810 billion Government Pension Fund Global, the official name, returned 5 percent in the third quarter, representing a 228 billion kroner ($39 billion) gain, it said today. Bond investments climbed 0.3 percent and real estate holdings returned 4.1 percent, it said.

The fund has no immediate pension obligations and uses its long-term outlook to buy assets when others have to sell. After losing a record 633 billion kroner following the 2008 collapse of Lehman Brothers Holdings Inc. and ensuing global market slump, the fund raised its equity holdings by about 136 billion kroner in early 2009. In the second half of 2011, the fund bought more than 150 billion kroner in stocks as part of a strategy to invest in depressed assets.

Positive Signs

“In general, we see market corrections more as opportunities than as threats, so it’s not something that worries us,” Slyngstad said today in an interview. “If they come, that’s just a positive sign for us as an investor.”

Stocks rallied in the third quarter as the U.S. Federal Reserve unexpectedly refrained from ending its $85 billion-a-month quantitative easing program in September. Growth forecasts for China, the world’s second-biggest economy, also improved, propelling equities globally. The MSCI World Index of stocks gained 7.7 percent in the quarter, paring some gains late last month during the U.S. government shutdown.

The advance has pushed valuations for European shares to the most expensive level since the end of 2009. The Stoxx Europe 600 Index trades at 20.8 times reported operating profit, double the level from September 2011, according to data compiled by Bloomberg.

Holding Cash

Norway’s wealth fund, which gets its guidelines from the government, held 63.6 percent in stocks at the end of September, up from 63.4 percent in the second quarter. Bond holdings slid to 35.5 percent from 35.7 percent while real estate accounted for 0.9 percent. The fund is mandated to hold 60 percent in stocks, 35 percent in bonds and is building up to 5 percent in real estate, while allowing for fluctuations. It mostly follows global indexes and has some leeway to stray from those benchmarks.

“If you’re not buying equities these days, we’re buying bonds or just hold this as cash,” Slyngstad said. “We would of course like to invest more of it in the real estate market but that takes longer. As long as there are strong markets we don’t see any urge to increase our equity holdings.”

The investor, which posted its second-best year in 2012, is also undergoing a shift in strategy to capture more global growth. That’s involved moving investments away from Europe as emerging markets in Asia and South American make up a bigger share of the world economy. The fund has weighted its bond portfolio according to gross domestic product, after shifting away from a market weighting to avoid nations with growing debt burdens.

Largest Holdings

Its largest stock holding at the end of the quarter was Nestle SA, at a value of 38.5 billion kroner. The biggest bond holding was in U.S. Treasuries, at a value of 344 billion kroner, followed by Japanese and German government bonds.

“We consider U.S. Treasuries one of the safest investments you can do, and these last few weeks have not changed that view in any way,” Slyngstad said in the interview, referring to the first partial government shutdown in 17 years.

Mexico rose to fifth place in the fund’s bond holdings, while Brazil and South Korea joined the top 10, at the expense of France and Canada.

The fund will take “the time needed” to increase real estate investments to reach the target of 5 percent of total holdings, making bigger investments increasingly on its own rather than in partnerships, Slyngstad said. An initial ambition to reach the target in five years from its first real estate investment in 2010 may not be realized, he said.

Splitting Fund

Norway 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. Norway is western Europe’s largest oil and gas producer. The fund, which had an average holding of 1.2 percent of the world’s listed companies at the end of 2012, invests abroad to avoid stoking domestic inflation.

Prime Minister Erna Solberg, whose government took power this month, said before the election she would consider splitting the fund into smaller units.

The government deposited 58 billion kroner of petroleum revenue into the fund in the quarter. The return beat the benchmark set by the Finance Ministry by 0.1 percentage point.

The investor got its first capital infusion in 1996 and has been taking on more risk as it expands globally. It first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.

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