Our 90 private pension funds had an average 2005 return of 13% while our 29 municipal pension funds had an average return of 9.4%," reports Rolf Skomsvold, secretary general of the Norwegian Pension Fund Association. "The variation is largely explained by the difference in asset allocation, with private funds having on average 33% in equities and municipal funds an average of 20%," he says. "The value of Norwegian equities on the Oslo Stock Exchange rose by 40% through 2005. And while some of the larger funds also invest abroad for most it's mainly Norwegian."
Runar Gulhaugen, chief investment officer of the Norsk Hydros pension fund, agrees. "The main driver of our 2005 result was equities," he says. "It was more Norwegian than global but we are gradually scaling down the proportion of domestic equities because of the very high returns, and it is quite a shallow market and we know when it turns down again the movement will be greater than elsewhere. At the end of 2005 our asset allocation was we had about 35-36% in equities, 18% in real estate, 4% in alternatives and the remainder in fixed income."
Telenor Pensjonkasse is further along with the transition. Again, the main contributor to its 2005 return was equities, but equities account for some 25% of its portfolio and they are more diversified, says Tom Jarneid, investment manager at Telenor Pensjonkasse. "Of our equity holdings about one quarter are in Norwegian equities, another quarter in the rest of the Nordic region, where the performance was around 27%, and a half is in globals."
At the end of last year 55% of the portfolio was in fixed income and the rest in alternatives. "The main part is in real estate, we have a small portion in private equity and about 5% in hedge funds," says Jarneid.
Like Gulhaugen, Jarneid sees the possibility of a correction in the domestic stockmarket. "Norwegian equities have shown an annual return of about 14.5% for the last 10 years and they has outperformed the global index by something like five percentage points," he says. "But of course this cannot continue and we know that Norwegian equities have a much higher volatility than those in other markets, not only because it is a relatively small market but because a high proportion of the companies that are listed in Norway are very dependent on oil. Even trading companies are very dependent on the oil price."
In fact the economy is dependent on oil, and unlike elsewhere a rising oil price boosts domestic share prices. "The activity level for both the construction and oil sectors have been at record levels for the last couple of years," says Jarneid. "The whole economy is booming now; there has been an increase in loans and investment is surging. However, the central bank is in a dilemma because core inflation is very low, at 0.6%, and it can't meet its target of 2.5%."
So what do robust oil prices, worries about equities topping out and an expectation that global interest rates are on an upward trend mean for Telenor Pensjonkasse asset allocation? "When we had the very low interest level, with the short end of the curve around 2% at its lowest and the long end down to 3.2%, we still had to meet our guarantee requirement of 4%," says Jarneid. "That's why we invested last year in real estate, we increased our hedge fund exposure and also private equity. We have tried to use the alternatives to increase expected returns."
But Folketrygfondet, which with the Petroleum Fund, renamed the Government Pension Fund-Global is part of the Norwegian State Pension Fund, does not have such freedom to manoeuvre. "We have a rather limited investment universe," says deputy managing director Lars Tronsgaard. "While the Petroleum Fund, invests internationally we invest almost entirely in the domestic market apart from some small equity holdings in the other Nordic countries."
At the end of last year the portfolio allocation 21% in Norwegian equities, 5% in other Nordic equities, 59% in Norwegian government bonds and 15% in Norwegian credit. The overall return was 9%.
"We are rather large shareholders in all major companies in the domestic equity market, and we hold 4% to 5% of the Oslo stock exchange's main share index, which is a lot for one investor," says Tronsgaard. "So we have to take a long-term perspective on our investments. If we wanted to make major changes in the portfolio, which in fact we do, we have to make them over the long term. We can't just decide to get out of a stock and a week later it's done, unless it's a very small investment. With the large investments that has to be part of a long-term plan because otherwise we would destabilise the market, and we are not supposed to do that.
"Our main asset allocation changes would have to be from equities to fixed income, or the other way, and that is something that we are currently considering. But within equities there is not very much we can do geographically so it would be down to considerations of which categories or branches we would like to invest in."
Gulhaugen also believes in moving slowly. "We will continue with what we were doing last year and the beginning of this year but we take it very steadily," he says. "We are moving into three areas: international equities, alternatives and bonds. We don't try to time the market, we make our changes in slow gradual moves. The main downside risk that we see now is the global growth scenario, and of course the current geopolitical unpredictability. But the multiples for global equities are not that challenging at the moment, so if we don't get a slowdown it could be OK."
Regulatory changes are also coming slowly in Norway but they are coming, says Skomsvold. "The regulator is looking at some kind of traffic light system," he says. "It will not happen this year but perhaps sometime next year. But the biggest challenge will be to value liabilities at market rate, which is something we certainly haven't done before. And that will be very problematic because we haven't got a long-term bond market in Norway and the bond market we do have is very limited. So we are going to have some serious difficulties implementing regulations like that."
Although the Petroleum Fund ensures that the oil sector does not destabilise the mainland economy, oil ensures that government has no need to tap the markets. "It just issues bonds to kind of keep the market up but the issuance is much too small," says Skomsvold. "And we are quite expensive to hedge against because the Norwegian krona is a very small market."
Jarneid appears even less concerned by the prospects of a traffic light system than Skomsvold. "It was a suggestion from the regulator but that was turned down by the ministry," he says.
"They are coming up with a new system similar to EU regulations. It will probably take years. So far we have only been regulated on the asset side. There are special rules about how we should calculate the pension liabilities, but we don't have to calculate the asset and liabilities together. That's on the horizon and then when the interest level is below 4% we will have a problem."
And hedging? "We have an opportunistic hedging strategy," says Jarneid. "Because we have seen volatility in the currency market and a weakening of the krona in recent weeks it has been easier to hedge the krona than before."