Norway’s $890 Billion Wealth Fund to Target Frontier Markets

Norway’s $890 billion wealth fund, the world’s largest, will expand the scope of its investments to target more “frontier markets” and add more currencies to generate higher returns.

It will add “exposure to different sources of return and seek to exploit time-varying investment opportunities,” Norges Bank Investment Management said in a 2014-2016 strategy report today. NBIM expects to invest 1 percent of the fund in real estate in each of the next three years and will raise the number of companies it holds more than 5 percent in to 100 by 2016.

In Africa and the Middle East there “are quite a few countries where we’re not invested,” Yngve Slyngstad, chief executive officer of the fund, said today in a telephone interview. “Particularly in Africa, the majority of our investments are in South Africa, although we have some investments in Egypt, Morocco, Kenya.”

The fund, which owns about 1.3 percent of the world’s stocks, has failed to meet a 4 percent real return target since it started investing in the late 1990s. Norges Bank Governor Oeystein Olsen, who oversees the fund, has said it must take on more risk to increase returns. In addition to infrastructure and private equity, he advocates increasing stock holdings to 70 percent from the current 60 percent limit.

1% Position

Slyngstad declined to be specific on how much the fund was looking to invest in new frontier markets, adding that it “quite often” tends to be in a position of “around 1 percent” in new markets when comparing its holdings relative to the size of a market.

Frontier markets, also called pre-emerging markets, have equity markets that are less established than in emerging markets. These include countries such as Argentina, Ukraine and Kazakhstan, according to MSCI Inc. The MSCI Frontier Market Index is up 16 percent this year compared with a 5 percent gain for the MSCI World Index of developed market shares.

“We think we should be as broadly diversified in the global economy as possible, so that means we will continue to add more markets as soon as they satisfy our minimum requirements for market standards,” Slyngstad said.

The ministry backed the plans and “believes that Norges Bank should retain responsibility for approving investments in such markets,” Paal Bjoernestad, a state secretary at the Finance Ministry, said in an e-mailed response to questions.

Plug Deficits

It will also increase the number of employees to about 600 from 370 now, mostly outside Norway, including 200 for its real estate division, the fund said.

The goal of a 4 percent real return over time will be “better served if a larger share of the fund is invested with the global economy,” the fund said. NBIM will “prepare the organization for a change in this direction,” it said.

Since the establishment of NBIM in 1998, the fund has a real annual return of 3.6 percent and a nominal return of 5.7 percent. Measured in dollars, its return is 6.7 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 about 1 percent of its total portfolio.

The fund is looking to expand into real estate in Asia and reiterated its interest in “global cities outside Europe and the U.S.” While real-estate investments from London to San Francisco have mostly taken the form of joint ventures, the fund is preparing to manage fully-owned properties with a more active role in development, it said.

“Larger ownership stakes in listed real-estate companies and public-to-private transactions will be considered,” the fund said.

Norway, western Europe’s biggest oil and gas producer, channels its petroleum income into the wealth fund to shield the $500 billion economy from overheating. The fund 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.

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