Norway Wealth Fund’s Losses on Russia, China Erode Returns

Apr 30, 2014 5:18 am ET

(Updates with previous returns in third paragraph.)

April 30 (Bloomberg) -- Norway’s sovereign wealth fund, the world’s largest, reported the lowest returns in three quarters, dragged down by losses in China and Russia.

The Government Pension Fund Global rose 1.7 percent in the first quarter, or 78 billion kroner ($13 billion), the Oslo- based investor said today. Stock holdings increased 1.5 percent, while its bonds climbed 2 percent. Real estate returned 2 percent. The $850 billion fund returned 4.7 percent in the fourth quarter.

“Asian equities produced a negative return, while European and North American stocks made a positive contribution,” the fund said. “Increased uncertainty in the market put a damper on returns in the quarter.”

The fund’s return was the lowest since the second quarter last year, when it gained just 0.1 percent. A surge in global equities stalled in the first three months, dragged down by investor concern the conflict between Russia and Ukraine is escalating. The MSCI World Index rose 0.8 percent in the quarter, after rising 24 percent last year.

The investor lost 6.1 percent on its Chinese stock holdings, which accounted for 2.4 percent of the total equity portfolio. It lost 9.7 percent on its investments in Russian government bonds in the period.

Global Index

Norway’s wealth fund, which gets its guidelines from the government, held 61.1 percent in stocks at the end of March, down from 61.7 percent in December. Bond holdings rose to 37.7 percent from 37.3 percent and it held 1.2 percent in real estate. It’s mandated to hold about 60 percent in stocks, 35 percent in debt and 5 percent in properties. While the investor mostly follows global indexes, it has some leeway to stray from those benchmarks.

The government deposited 41 billion kroner of petroleum revenue into the fund in the quarter.

Its largest stock holding was Nestle SA followed by Royal Dutch Shell Plc. The biggest bond holdings were in U.S. Treasuries, Japanese and German governments bonds.

The return beat by 0.01 percentage point the benchmark set by the Finance Ministry.

Last year, the fund was forced to sell stocks for the first time in its history, to comply with risk mandates. The rally in the markets pushed the stock portfolio to above a 64 percent limit, forcing a so-called rebalancing. The fund follows a strategy where it buys assets that fall in price and sells as they rally.

Tracking GDP

The fund is shifting its holdings to capture more of global growth and has steered investments away from Europe as emerging markets in Asia and South America increase their share of the world economy. The fund has weighted its bond portfolio according to gross domestic, moving away from a market weighting to avoid nations with growing debt burdens.

The biggest increases in bond holdings in the quarter were in Brazilian, Turkish and Mexican government bonds, while the biggest decreases were in government bonds issued by the U.S., Germany and Sweden, the fund said.

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. Norway is western Europe’s biggest oil and gas producer. The fund invests abroad to avoid stoking domestic inflation.

It got its first capital infusion in 1996 and has been taking on more risk as it expands globally, raising its stock portfolio from 40 percent in 2007. The fund first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth. It’s struggling to meet a 4 percent return target after rates plunged to record lows and global stock markets failed to retrace a 2007 peak.