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Norwegian oil fund should up equity share, government told in split verdict

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Norway’s sovereign wealth fund, the Government Pension Fund Global (GPFG), should increase its equity allocation to 70%, according to the majority view of a government-appointed commission.

The Mork Commission, appointed in January to review the fund’s exposure to listed stocks and consider different equity shares, delivered its report to the Norwegian Ministry of Finance today.

The majority view in the nine-strong commission is that the GPFG’s equity share should be increased to 70% from 60%.

A minority believes the equity share should be reduced, to 50%.

The chairperson of the commission and its namesake, Knut Anton Mork, backs this position.

In a statement, he said a lower interest-rate level should not have any impact on the equity share.

“The choice of equity share is a trade-off between expected return and risk,” he said.

“The trade-off needs to reflect the risk of loss of wealth, the level of overall risk in the nation’s total wealth and the fiscal policy role of the Fund.”

The commission statement goes on to note that long-term, near risk-free real interest rates have declined since the last time the GPFG’s equity share was assessed, a decade ago.

It is basing its recommendation on the premise that the expected excess return from investing in equities is largely unchanged since then.

Against this background, it said, it believes the expected real rate of return on the GPFG is now considerably less than 4%.

“With the current equity share, the Commission is assuming an expected, annual real rate of return on the Fund of 2.3% over the next 30 years,” it said.

Setting out its recommendation for the fund to increase its equity exposure, the majority camp said it considered the associated increased risk to be acceptable, “provided that there is political will and ability to adapt economic policy to the accompanying increase in risk, in both the short and long run”.

It also said experience and political understanding of the management of the fund had increased over time, that operational risk was low, and that petroleum wealth was now better diversified than it was 10 years ago.

In recommending the equity share be lowered, the minority view emphasised the importance of the predictability of budget contributions from the GPFG and said fiscal policy “needs to adapt to th[e] fact” of a lower equity share translating into a lower expected return for the fund as a whole.

If the Norwegian government does decide to change the sovereign wealth fund’s equity share, it should pay attention to issues such as the composition of the fixed income benchmark index, deviations from market weights and financial risk from climate change and the risk of a permanent decline in oil and gas revenues, according to the commission. 

Next steps

Responding to the report from the Mork Commission, Norway’s finance minister Siv Jensen said: “The choice of equity portion is of major importance for expected risk and return in the GPFG.

“The investment strategy of the GPFG has been developed over time, on the basis of thorough analyses and accumulated experience.

“This paves the way for sound long-term management of the fund capital, thus enabling the petroleum wealth to benefit both current and future generations.”

The Norwegian government will consult on the Mork Commission’s report, whose recommendations will inform the follow-up to another Commission, the Thøgersen-Commission.

In the spring of next year, the government will report to Parliament on an assessment of the Thøgersen-Commission’s recommendations; this will be in the form of a report to Parliament on long-term perspectives for the Norwegian economy.

The Thøgersen-Commission advised the government on how the fiscal policy guidelines applicable to the GPFG should be practised in coming years

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