Low bond yields trigger review of Norwegian oil fund's equity allocation
Norway’s NOK7.1bn (€733bn) sovereign wealth fund may see its exposure to equity increase beyond its current 60% allocation, after the government commissioned a review of its exposure to listed stocks.
The Norwegian Ministry of Finance has asked a nine-strong committee, chaired by Knut Anton Mork, long-standing chief economist of Handelsbanken, to review the Government Pension Fund Global’s (GPFG) approach to equity investment, citing concerns the fund’s current exposure to fixed income no longer reduces volatility.
The committee will also include a number of academics, financial markets experts and Sigbjørn Johnsen, a member of the opposition Labour party who has twice served as Norway’s finance minister.
Setting out the review’s terms of reference, the ministry noted the current low-bond-yield environment across both short and long-dated debt.
“The scope for further bond price gains is now limited by the low bond yield level, whilst the scope for price losses in the event of increasing bond yields are considerable,” it said.
The committee, which will report in October this year, will review the expected risk stemming from, and return potential of, equity exposure other than the current 60% strategic allocation, and recommend any changes to the target.
“In assessing the equity portion, the committee shall, inter alia, consider the fund’s objective, time horizon and size,” the ministry added, “as well as expected outflows from the fund.”
The review comes shortly after the Norwegian government was urged to expand the GPFG’s investment remit to include infrastructure and a potentially increased exposure to real estate, currently capped at 5% of fund assets.
As a result, an increase in the fund’s equity exposure is far from certain, due to the potential for its real estate exposure to rise and the possible introduction of a standalone infrastructure allocation.
The sovereign fund currently accounts for a significant minority of government expenditure, around one in eight kroner spent annually, despite yearly drawdowns being limited to 4% to avoid its depletion.
Any change in strategy is unlikely to be implemented for at least a year, as the government said in a statement that it would only address the matter of a revised equity exposure when the fund’s annual report was submitted to Parliament in spring 2017.
At the end of September last year, 59.7% of the fund was invested in equities, 37.3% in fixed income and the remaining 3% in real estate.
The fund’s current 60% exposure to equities has been in place since 2007, while the 5% target allocation to real estate was announced in 2008.