World’s Biggest Sovereign Fund Needs to Add Risk, Olsen Says

Feb 14, 2014 7:36 am ET

(Updates to show size of wealth fund in first paragraph.)

Feb. 14 (Bloomberg) -- Oeystein Olsen, the governor of Norway’s central bank, said he’s planning to petition the government to allow the nation’s $830 billion wealth fund to cut bond holdings further to help it generate bigger returns.

“At some point we will write a letter to the Ministry of Finance -- that’s also our role as an adviser - and finally it’s their decision,” he said in an interview yesterday in Oslo. “It’s a decision by the government and the parliament.”

Olsen used the occasion of his annual speech yesterday to recommend that the fund cut bond holdings to 20 percent to 25 percent of its portfolio, from the current 35 percent to 40 percent. The investor is also mandated to hold 60 percent in stocks and as much as 5 percent in real estate. The central bank’s investment management unit runs the oil fund on behalf of the Finance Ministry, which has the final say on strategy.

It’s “really a longer run perspective discussing and analyzing what’s a reasonable division between assets -- equities or real estate or other infrastructure,” he said.

Norway is debating how to structure investments at the world’s biggest wealth fund, which exceeds both the Abu Dhabi Investment Authority and Saudi Arabia’s SAMA in size, in an effort to generate better returns. The Conservative Party-led coalition that took power in October is due to release a white paper in April listing its proposals on how to run the fund.

Reaching Ceiling

Built from Norway’s oil and gas revenue, the fund has missed its 4 percent return target over the past decade, weighed down by record losses during the financial crisis. Since getting its first capital infusion in 1996, the fund 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 needed to safeguard the wealth of western Europe’s largest oil exporter.

“It’s not urgent in the sense that we now actually have a mandate saying that we could invest up to 5 percent of the total fund in real estate,” he said. “We’re quite far from reaching that ceiling.”

Olsen said in November it would be natural for the fund to buy assets such as private equity and infrastructure. The former Labor-led government had rejected a plea by the fund to follow the central bank’s advice.

“A few years from now, almost two-thirds of the fund will thus be invested in real assets,” Olsen said in the text of yesterday’s speech. “This is a fairly high share. A pertinent question may still be whether as much as a third of the fund should be invested in low-yielding instruments.”

The government estimated in its latest budget that the fund will grow to 7.28 trillion kroner ($1.2 trillion) by 2020.

The fund returned 5 percent in the third quarter, helped by a 7.6 percent gain in stock investments. Over the past 10 years, its annual real return has been 3.96 percent.

The MSCI World Index returned 33 percent over the past three years, beating the 7.1 percent gain in the Bloomberg Global Developed Sovereign Bond Index, according to data compiled by Bloomberg.

--Editors: Jonas Bergman, Tasneem Brogger