Norway’s Wealth Fund Wants to Add $129 Billion in Stocksby and
Seeks to boost equity portion of portfolio to 75% from 60%
Sees returns below 3% over the next decade amid low rates
Norway’s $860 billion wealth fund recommended it add about $130 billion in stocks and sell off bonds as it presented a bleak view on the returns from its investments across the globe in the decades to come.
The central bank’s board, which oversees the fund, on Thursday recommended an increase in the equity share to 75 percent from 60 percent. That will raise the expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent, respectively, under the current setup.
The world’s largest sovereign wealth fund said that it expects an annual return of only 0.25 percent on bonds over the next decade and that the expected “equity risk premium,” or return on stocks over government bonds, will be just 3 percentage points in a cautious estimate.
“In our analyses, this is clearly evident in global data: internationally, growth in firms’ cash flows and equity returns are correlated with growth in the global economy,” Deputy Governor Egil Matsen said in a speech Thursday in Oslo. “Global economic growth in the coming years is expected to be below its historical level. This ‘pessimism’ is partly related to the driving forces behind the low level of the real interest rate.”
The final decision will be made by parliament. The fund’s recommendation comes after a government-appointed commission recommended it needed raise its stake in stocks as record low interest rates and a weak global economy will otherwise lower returns to just above 2 percent a year over the next three decades.
The recent U.S. election was used as an input in the analysis but didn’t impact the return projections in a “significant way,” Matsen said in an interview after the speech.
Norway is looking for ways to boost returns that have missed a real return goal of 4 percent as rates have plunged globally in the aftermath of the financial crisis. The government is this year withdrawing money from the fund for the first time to make up for lost oil income after crude prices collapsed over the past two years.
After getting its first capital infusion 20 years ago, the fund has added risk, expanding into stocks in 1998, emerging markets in 2000 and real estate in 2011 to safeguard the wealth of western Europe’s largest oil exporter.
It’s currently mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate. After inflation and management costs, it has returned 3.44 percent a year over the past 10 years and 8.25 percent a year over the past five.