World’s Biggest Wealth Fund Sees Backing to Expand Mandate

Jan 09, 2014 6:06 am ET

(Updates with comments on krone, housing from premier in last two paragraphs.)

Jan. 9 (Bloomberg) -- Norway’s $820 billion sovereign wealth fund, the world’s largest, is closer to getting the go ahead to expand into more asset classes as it struggles to meet return targets.

Investing in pipelines, roads and other infrastructure would be a good fit for the wealth fund as the government considers ways to get more out of the investor, Prime Minister Erna Solberg said yesterday in an interview in Oslo.

The 52-year-old Conservative Party leader is reviewing how the fund is managed after taking office in October. Built from oil and gas revenue, the fund has missed a 4 percent return target over the past decade, in part as financial market turmoil that started in the U.S. and spread to Europe led to record investment losses.

Broadening the mandate to infrastructure is “part of the discussion that we will have,” Solberg said. “The most important part is that we have security in our investments. We should do it conservatively and without much risk-taking.”

So far, the government has proposed boosting the fund’s focus on emerging markets and clean energy. Norway will present a white paper in the spring with proposed changes. It’s currently mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate.

‘Fit Perfectly’

“Infrastructure could fit perfectly into that, if that gives us the same type of return,” Solberg said. For now, her government isn’t “especially looking at infrastructure, but I’m not saying that we should not do it.”

Oeystein Olsen, governor of Norges Bank which oversees the management of the fund, said in November it would be natural for the fund to enter assets such as infrastructure and private equity. The previous Labor-led government in 2011 rejected a proposal by the fund and a government-appointed group to allow such investments, citing management costs and limited returns.

The fund, which got its first capital infusion in 1996, has been taking on more risk as it expands, adding stocks in 1998, emerging markets in 2000 and real estate in 2011 to help returns and safeguard the wealth of western Europe’s largest oil exporter.

It’s now undergoing a shift in strategy to capture more global growth by moving away from Europe as emerging markets in Asia and South America make up a bigger share of the world economy. The fund has weighted its bond portfolio according to gross domestic product, after shifting away from a market weighting, to avoid nations with growing debt burdens.

Split Shelved

Solberg backed comments by Finance Minister Siv Jensen last year that the government has no immediate plans to split the fund into more manageable units, a move hinted at before taking office.

Splitting the oil fund “is not part of the platform for this government but it will be looked into,” Solberg said.

The fund held 63.6 percent in stocks at the end of September, up from 63.4 percent in the second quarter. Bond holdings slid to 35.5 percent from 35.7 percent while real estate accounted for 0.9 percent.

The Government Pension Fund Global, the wealth fund’s official name, returned 5 percent in the third quarter, representing a 228 billion kroner ($37 billion) gain, it said in October. Its annual real return over the past 10 years was 3.96 percent.

Coal Power

Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company. The fund, which had an average holding of 1.2 percent of the world’s listed companies at the end of 2012, invests abroad to avoid stoking domestic inflation.

The Labor Party, now in opposition, also last year proposed a ban on investments in stocks and bonds issued by coal companies in a bid to promote cleaner energy.

Following the ban would be “a bit difficult because many of the coal power plant companies are also among the biggest investors in renewable energy,” Solberg said. “If this means there will be fewer investors in renewable energy because the coal companies that also invest in this will not get investors like the Norwegian oil fund, I think it’s counterproductive.”

Solberg also yesterday indicated that the government remains attuned to moves in the krone, which has weakened 13 percent over the past 12 months against the euro and eased pressure on Norwegian exporters. It seems “the market is functioning very well,” she said, adding that the currency “will always be a part of what we are looking at.”

The premier said that there’s no reason to think that there’s going to be “very large” decline in housing prices because of the strength of the Norwegian economy. Housing prices have slid for four consecutive months since August, after doubling over the past decade.

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--Editors: Jonas Bergman, Tasneem Brogger