Norway’s Domestic Pension Fund Cutting Nordic Corporate Bonds

Government Pension Fund Norway, the domestic counterpart to its $880 billion wealth fund, is cutting its holdings in Nordic corporate bonds after a surge in demand triggered a mispricing of risk.

Folketrygdfondet, which manages 183.5 billion kroner ($29.7 billion) for the government and invests mostly in local markets, is reducing credit duration and boosting the share of higher-rated debt in its high-yield portfolio amid falling costs for risk, Lars Tronsgaard, deputy managing director of the fund, said in an interview yesterday.

“We would rather like to see it priced better to take on both interest rate duration and especially credit duration,” said Tronsgaard, who manages the fund’s bond portfolio.

Investors have flocked to higher-yielding debt amid signs the global economy is strengthening and as returns on government bonds remain scant. Companies have issued 73.6 billion kroner in bonds in Norway, home to Scandinavia’s largest junk-bond market, in the year to July 31, according to Nordea Bank AB.

The fund is mandated to hold 60 percent in stocks and 40 percent in bonds. Of that, 84 percent is invested in Norway, and the rest in Sweden, Denmark and Finland.

The option-adjusted spread on the Bloomberg Global High Yield Corporate Bond Index declined 17 percent over the past year and has fallen 53 percent since reaching a high of 847 basis points in 2011, according to data compiled by Bloomberg.

BB Focus

“Credit margins are being reduced, especially when you’re talking about sectors like senior bank bonds, OMF bonds and to some degree high-yield,” Tronsgaard said. “We still haven’t reduced the high-yield portfolio very much but we’ve been more focused on the best part of the high-yield market, meaning BB.”

Folketrygdfondet saw a 6.7 percent increase in its Government Pension Fund Norway in the second quarter to 183.5 billion kroner. The return was 0.1 percentage point above the benchmark from the Finance Ministry, which sets the mandate for the fund. Bonds returned 2.7 percent in the quarter compared to average annual return of 7 percent over the past five years.

“We are in a special situation where we have a very high risk tolerance and a very long view on investments,” Tronsgaard said. “We can utilize our risk tolerance to buy when risk premia are really high in the market.”

The DNB High Yield Total Return Index rose 9.9 percent over the past 12 months. That compares with a 5.4 percent increase for Norwegian government bonds, according to Bloomberg Sovereign Indexes.

“In the aftermath of the financial crisis when credit spreads increased immensely we bought as much we could get our hands on,” according to the executive. “In 2011-2012, when we also saw a spike in credit margins we increased a bit then and after that we have gradually reduced credit exposure in line with reduced credit margins up to today.”

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