At some $600bn, Norway now has the second largest sovereign wealth fund in the world. This massive oil wealth isn’t left for the government to spend (squander). Instead, it’s rolled up into the petroleum fund, which is then managed by Norges Bank.
This fund grows bigger and more important every day – especially when oil is trading at today’s prices. But even more importantly, the fund has had an excellent record on its investments.
As it happens, Norway is currently Europe’s biggest equity investor. But here’s the thing: it plans to sharply reduce its exposure to Europe.
The Norwegians, it turns out, had their fingers burnt on Greek debt. Maybe they had been a little naive. They believed the Europeans when they said “no defaults”. They convinced themselves that the European man’s word was his bond. More fool them!
So maybe now it’s a case of once bitten, twice shy. Their strategy suggests wariness over European bonds. The European fixed-income portfolio is to be cut from 60% to 40%.
Interestingly it’s not just Europe’s bonds that worry them. Exposure to European equities will be cut from 47% to 38%.
Of course, this will be a gradual rebalancing. These sorts of positions take a while to unwind. But it’s still a sizeable chunk.
And what are they doing instead? Well, mostly they’re reinvesting in emerging markets and Asia-Pacific. That’s what I took away after reading the fund managers’ strategy documents.
How exactly are they doing that?
Well, although it was set up over twenty years ago, it wasn’t until recently that the fund went into equities. It was originally set up as a bond fund. And that’s turned out to have been an inspired move. Perhaps it’s been as much to do with luck as judgement, but the fact of the matter is that barring the odd Greek hiccup, sovereign bonds have been a fantastic asset class. They’ve offered safe and steady returns.
Norges Bank is looking to repeat the same trick in emerging markets.
According to [the] report, “Norges Bank recommends the expansion of the strategic benchmark index for bond investments to include emerging market currencies…”
And that’s not all. It’s also going to raise the stakes in developed Asia-Pacific’s bonds too. It’s going to expand exposure from the current 5% to 11%.
This is a currency issue. The Norwegians can see as well as anyone else the dangers presented by money printing. Though they didn’t say, I suspect they’re looking towards strongly managed economies like Singapore, Malaysia and Hong Kong to balance their exposure to dollar, euro and yen debt. They see better returns with reduced volatility on the other side of the globe. And I’d have to agree with them.
Bengt Saelensminde
Contributing Editor, MoneyWeek (UK)
Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).
From the Archives…
Why Spain’s Economy is the Next Big Problem for the Eurozone
2012-03-30 – John Stepek
Water: A Long Term Trend to Follow
2012-03-29 – Patrick Vail
How to Avoid the Welfare State Hunger Games
2012-03-28 – Kris Sayce
What Happens When You Put Someone With No Market Experience in the Top Job?
2012-03-27 – Dr. Alex Cowie
The Star Stocks of the Resource Sector
2012-03-26 – Dr. Alex Cowie
Why You Should Follow the Norwegians East to Emerging Markets
