Norway Looks at Riskier Assets as Wealth Fund Transfers Loom

  • Adding stocks could increase expected return, ministry says
  • Says withdrawals are no challenge to fund's strategy

As Norway prepares to make the first withdrawals from its $820 billion wealth fund, the government is considering letting it take on riskier investments.

The Finance Ministry is looking into whether to boost the fund’s stock allocation to beyond 60 percent as the investor struggles with record low bond yields. Norway is forming a panel to assess the impact of changing the limit. It’s due to report back in 2017.

“Obviously equity has a higher risk premium and gives a higher expected return, but of course with more fluctuations,” Paal Bjoernestad, the state secretary in charge of the fund at the ministry, said in an interview in Oslo Wednesday. “We’re an extremely long-term investor, all this could facilitate that we increase the risk in the fund and also the expected return.”

The potential shift follows the government’s revelation on Wednesday it will for the first time need to withdraw cash from the fund to counter a slump in oil prices and prop up the economy of western Europe’s biggest crude producer. The minority coalition said it would need to take 3.7 billion kroner ($450 million) out of the fund next year, after inflows of 38 billion kroner this year and 156 billion kroner in 2014.  

Maximize Returns

Central bank Governor Oeystein Olsen, who oversees the fund, has previously recommended boosting its equity allocation to about 70 percent. It’s currently mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate.

“In order to maximize the long-term return, it could be a good reason to increase the allocation to equity,” said Bjoernestad, the second in command at the Finance Ministry. Any shift would “be at the expense of fixed income,” he said.

Olsen and other managers of the fund, set up to safeguard the wealth of future generations, warn that it faces scant returns amid record-low interest rates. A lack of new inflows will also make managing the fund more difficult. It has typically used inflows from the government to make strategy shifts, such as when it went into real estate or increased its stake in emerging markets. It’s now dealing with potential withdrawals as it targets adding infrastructure to its portfolio of approved asset classes. It also wants to raise its real estate allocation.

Tokyo Office

As flagged in August, the investor on Thursday announced it’s opening a new office in Tokyo, adding to locations in Oslo, London, New York, Singapore and Shanghai. The office will be exclusively focused on real estate as it prepares to make its first property purchases in Asia.

“Having a separate real estate office in Tokyo will give us that important local presence and help us build the best possible property portfolio in this market,” Karsten Kallevig, the chief investment officer for real estate at the fund, said in a statement.

As it prepares to make a withdrawal, the government says the fund will continue to grow as it uses less than its 4 percent expected return, countering criticism from the opposition that it was “breaking the nation’s piggy bank.”

Bjoernestad said the fund is well-equipped to handle this new reality.

“As long as we just take out the real return -- and this year we don’t even take the real return -- we’re saving,” he said. “There’s no challenge to any strategies at the fund.”

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