NORWAY - Equity investments of the Norwegian Pension Fund Global (NPFG) fell by nearly 9% last year, with financial stocks - comprising almost a fifth of all equity exposure - hit particularly hard, as euro-zone banks announced losses and sought to shore up capital buffers.
Despite the equity portfolio's decline in value, nearly 70% of oil-revenue inflows from the petroleum fund were allocated to further European stock market investments, according to last year's annual report.
Reporting the third-worst returns since inception in 1998, Norges Bank Investment Management (NBIM) said the -2.5% return was only 0.1 percentage point lower than its benchmark, with a 7% return on fixed income able to offset most of the 8.8% decline in equities.
The asset manager's chief executive Yngve Slyngstad said the further allocation of more than NOK150bn (€19.3bn) to European equities was in line with its investment strategy to target stocks falling in price that "over time" would generate returns - despite Norges Bank governor Øystein Olsen recently saying the fund would seek to increase its exposure to emerging markets.
Slyngstad urged euro-zone leaders to come to terms with the crisis rocking the single currency.
"Because more than half of the fund is invested in Europe, it is of great importance to us that authorities are successful in solving the considerable structural and monetary challenges faced by the euro countries," he said.
Despite this, the fund experienced "strong" returns from its fixed income portfolio, reducing exposure to Italian and Spanish debt while increasing holdings in Treasury bills and UK gilts and seeing an overall outperformance of its fixed income benchmark.
The annual report highlighted gilts as the best-performing government bond in Europe, returning 17% over the course of the year, with T-bills returning the most since 2008.
While global financial stocks were only the scheme's second-worst performing equity sector, losing 19.2% of value over the year, European banking holdings fared even worse, declining by nearly a quarter and with Société Générale its worst-performing stock.
NPFG was also not immune to the effect of the Japanese earthquake and the ongoing effects of the Arab Spring, with its holdings in Fukushima Daiichi owner Tokyo Electric Power Company dropping by 91%, while equity investments of 0.2% in the Middle East and North Africa fell by more than 28% in value.
It also terminated a number of mandates, reducing externally managed assets by half, with the new appointments targeting emerging markets from Malaysia, Indonesia and Thailand, as well as small caps in European countries such as Germany.
At the end of December, NPFG had assets under management of NOK3.3trn, with the decline in equity value meaning its equity exposure only amounted to 58.7%, rather than 60%, of assets, with 41% in fixed income and only 0.3% held in real estate, a far cry from its targeted 5%.