Contrary to fears in 2005 that the domestic equity rally would ebb, last year Norwegian pension funds still benefited from continued high oil and commodity prices. These sectors boosted the performance of the Oslo Stock Exchange, which is heavily biased towards oil and oil services companies as well as the shipping industry. The exchange has seen a 40% rise over the past four years
Norwegian Pension Fund Association’s secretary general Rolf Skomsvold, says that many of the smaller funds have a home-bias in their equity allocation and that this proved fruitful last year.
Casper Holter, partner at investment consultant Pensjon & Finans, agrees that equities, particularly domestic equities, were the main performance booster for Norwegian investors in 2006. “Equities did outperform last year but the average equity holdings are still small by international comparisons,” he says. “Most funds fall far short of the 35% cap as the average equity allocation is about 30%. Of this 11% is invested in international equities through funds.” The boost to domestic equities bucked a long-term trend towards slowly increasing foreign assets, albeit temporarily, he adds.
“The Oslo Stock Exchange has outperformed since 2003 and so far this year has returned over 7%,” says Tom Jarneid, investment director at the Telenor Pensjonskasse. The fund returned 8.7% in 2006.
Despite the continued high oil prices, worries about the end of the equity rally and increased in interest rates, the NOK6bn (€747m) Telenor fund’s asset allocation remains stable. At the end of 2006 it had 25% in equities, of which three quarters were invested internationally. The bond allocation was 55%, with some 5-6% in foreign assets, and 12-13% was in domestic real estate. The remainder was invested in hedge funds. Jarneid says that no dramatic changes were on the cards.
Another good performing asset class was where real estate, but as the average allocation among Norwegian funds remains small, at less than 10%, it had less of an effect than equities, Holter says.
However, bonds underperformed, although not enough to wipe out the equity gains. “Long-term interest rates were increased in Norway so funds suffered losses, particularly as most funds have an even heavier domestic bias on the bond side than the equity side,” Holter notes.
Jarneid says that the solidity level was helped by higher interest rates because inflation kept up with the rates, now at 5.5%, compared with 3.25% only a few years ago. The Telenor fund has a 4% guarantee requirement. He adds that the Norwegian krone also rose compared with the larger currencies, and this also detracted from performance as not all assets were hedged back into krone.
“Norwegian equities have had an exceptional rally for several years and has contributed to very good results for Folketrygdfondet” says managing director Lars Tronsgaard. “We are a rather large shareholder in all major companies in the domestic equity market. Therefore we have to take a long-term perspective on our investments. If we wanted to make changes in the portfolio, which in fact we do as an active portfolio manager, we have to make them over the long term. Furthermore, being the largest investor in the domestic market, we never comment on what portfolio changes we are planning to do.”
Despite these concerns funds have been trying to scale down the proportion of domestic holdings but have not been able to keep up with the pace of market growth. The size of the local markets makes them very vulnerable and many fear that if the global volatility continues and has a marked effect, Norway downturn could be more severe than elsewhere because of its bias towards oil and commodities and the dependency of the entire economy to these sectors.
Industry professionals agreed that while most Norwegian institutions are not directly exposed to the sub-prime lending market which has been causing increased volatility globally, it is of concern going forward.
It is impossible to avoid mentioning the Government Pension Fund - Global, formerly the Petroleumfund, when talking about Norway, because of its size and international prominence. The fund ensures that the oil sector does not destabilise the mainland economy, but concerns have resurfaced because of the recent credit crunch. As expected, the €218bn fund, which only invests internationally, posted a bumper performance in 2006 with a return of 7.9%.
This year it is looking into investing in real estate for the first time. Currently it is approximately invested 60% in fixed income and 40% in equities.
The domestic portion of the Government Pension Fund is managed by Folketrygfondet, which had assets of €25bn at the end of 2006. It invests 50% of assets in domestic equities, 13% in equities and bonds from the other Nordic countries and the remainder in domestic bonds. Last year the fund returned 11.1%
Going forward, investment trends will continue in the same direction and pace among the majority of Norwegian funds, according to Holter. Equity allocation will continue to increase, depending on their solvency and risk profile, as well as a boost to international holdings can be expected.
Skomsvold said the industry is eagerly awaiting a proposed investment regulation change: “We are expecting a liberalisation of the current investment caps. But I am not sure how far reaching they will be, but whatever they are it will be better than the current situation. It can hardly be worse.”
Holter says that the proposal by the Norwegian financial regulator, Finanstillsynet, and the finance ministry has been sent out for consultation and a hearing is expected at the earliest during the fourth quarter.
“The biggest change will be that the 35% ceiling on equities will be removed,” he says. “And it is also expected that investments in emerging markets, private equity and hedge funds, referred to as ‘other investments’ will double to 10%.”
Another change, which most view as peculiar and contrary to any liberalisation efforts, is the introduction of a further restriction. The regulator wants institutional investors to have a maximum of 10% invested via funds and 1% in a single fund. “This is the opposite of what you would hope for, so the direction of the regulator is not clear,” says Jarneid. While there is a tendency to move towards EU regulation it is always by adopting the minimum requirements rather than actively changing much,
Adopting a traffic light system similar to that in Sweden continues to be discussed but is unlikely, as the finance ministry has already objected to its implementation. Industry observers say if anything comes of the discussions, implementation will be many years ahead.