Now Norway's Domestic Wealth Fund Is Getting WorriedBy
Fund is lowering credit risk by buying shorter maturity debt
Says pricing makes it ‘natural’ to ‘realize some profits’
After a market rally that lasted years, big active bets have lost their luster for Norway’s domestic wealth fund.
The 220 billion-krone ($28 billion) Government Pension Fund Norway, the domestic counterpart of Norway’s sovereign wealth fund, is cutting risk.
“It’s been a long cycle,” Chief Executive Officer Olaug Svarva said in an interview on Tuesday. “We’ve had good results in both our stock and bond portfolio with our long-term view. Pricing makes us think that it’s natural to realize some profits.”
Folketrygdfondet, which manages the fund on behalf of the Finance Ministry and invests in only Norwegian and Nordic assets, returned 2 percent for the second quarter, missing its benchmark by 0.1 percentage point. The stock portfolio, which is about 60 percent of the total fund, gained 2.7 percent.
“To be counter-cyclical is part of our investment strategy,” she said. “To go against the market is a big reason for our excess returns. Buying more when risk premiums are higher in the market.”
With about 27 percent of its fixed income investments in covered bonds, 24 percent in investment grade and 22 percent in government notes at end of June, bonds returned 1 percent for the fund as credit spreads continued to narrow in the quarter.
“It means that the risk premiums aren’t very high,” said Lars Tronsgaard, deputy managing director. “We’ve made an adjustment where the credit risk is lower than we would’ve had if risk premiums had been high, because the outcome is perhaps bigger on the upside than the downside -- it’s a natural adjustment.”
The fund is lowering credit risk by buying shorter maturity debt and moving to less risky sectors. That’s a process that will take time.
“We can’t do it in one quarter,” he said. “Perhaps it’s too early but we must do it like that.”