Biggest Wealth Fund Relies on Income Flows as Oil Cash Wanes

  • Fund says doesn't have to sell assets to make new purchases
  • Inflows declined to 17 billion kroner in first half of 2015

Norway’s $820 billion sovereign wealth fund is so far coping with the near halt in the inflow of oil cash by using its growing investment income to implement portfolio shifts.

With Brent crude this year down about 50 percent from a year ago, the Norwegian government is injecting less cash into the fund. Inflows were just 17 billion kroner ($2 billion) in the first half of this year, compared with a quarterly average of 60 billion kroner over the past 10 years. The decline has been manageable so far, said Oeyvind Schanke, chief investment officer for asset strategies, at the Oslo-based fund.

“We can raise cash from the coupons coming from the fixed income side or the dividends coming from the equity side,” Schanke said on Tuesday in an interview after speaking in Trondheim. “There’s still cash in the system, we don’t always have to sell something to buy something.”

As the fund has grown, so has its income from investments, giving it steady cash flow to help it adjust. Income from dividends and interest from bonds was 102 billion kroner in the first half of this year, up from 83.9 billion kroner a year earlier.

The fund has typically used inflows from the government to make strategy shifts in its portfolio, such as when it went into real estate or increased its stake in emerging markets at the expense of Europe. It’s now dealing with smaller capital injections as it targets adding infrastructure to its portfolio of approved asset classes. It also wants to raise its allocation to real estate.

“Now we have to find alternative ways,” Schanke said. Changes the fund made in 2008, when it started boosting investments in stocks to 60 percent from 40 percent, would have been “massively expensive” without the high volume of cash the government was then providing, he said. 

The fund posted a loss of 73 billion kroner in the second quarter, the first decline in three years, dragged down by falling global bond and stock markets.

The decline in inflows has already hampered the fund’s shift away from Europe, according to CEO Yngve Slyngstad. “We will see a bigger relative risk and somewhat larger implementation costs during strategy changes now,” he said in an interview in August.

A retrenchment could have a broad impact on investors across the globe, since the fund owns about 2.4 percent of European stocks and last year emerged as the second-largest foreign buyer of U.S. real estate.

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