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Norway’s SWF braces for big fluctuations in next three years

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Norway’s sovereign wealth fund, which has 70% of its now NOK9.7tn (€966bn) of assets in listed equities, must get ready for big swings in the fund’s value over the next three years, its manager has warned.

Norges Bank Investment Management (NBIM), which runs the Government Pension Fund Global, published a document on its strategy for 2020 to 2022, saying the new three-year plan continued in the direction that had been set by the strategy for 2017 to 2019.

Noting that the fund’s value passed the $1tn (€911bn) threshold in September 2017, NBIM said: “Trends and disruptions in the global economy such as increased trade barriers, low global interest rates, changing technology paradigms and climate change will affect the fund.

“We should be prepared for large fluctuations in the fund’s value,” it said.

Outlining four key points on the strategic direction for the next three years, NBIM said it would complement the fund’s investments in equities and fixed income by investing in real estate and renewable energy infrastructure, and exercise its ownership role to safeguard the fund’s long-term economic interests.

The organisation also said it would utilise a set of diversified investment strategies in a risk-controlled and low-cost manner, and foster a global, performance-oriented and efficient investment organisation.

NBIM said it plans to increase the number of external mandates it issues to 100 from 80 currently during the next three years.

But although the number of contracts is set to rise, the manager plans to maintain its current strategy of having external portfolio managers managing around 5% of the equity portfolio. 

NBIM said it used external portfolio managers in equity markets and segments where local specialist knowledge was particularly relevant. Around two thirds of the fund’s external specialist mandates would be in emerging markets.

“Except for China, Brazil and India, we expect close to all emerging market investments to be managed by external fund managers,” it said.

Last year NBIM terminated NOK20bn of externally managed, environment-related mandates. 

Renewable energy plans

Laying out its strategy for its new investments in unlisted renewable energy infrastructure, NBIM said it planned to have around 1% of the fund invested in these assets by the end of 2022.

These investments would focus on Europe and North America, it said, because these regions had tested regulatory frameworks as well as experience with private funding of infrastructure assets.

The primary investment focus would be on wind and solar power generation assets, NBIM said, adding that it would home in on projects with low power price risk, stable cash flow and limited risk to the principal investment.

While favouring equity investments for the new renewable energy infrastructure holdings, NBIM said it could invest elsewhere in the capital structure.

“We prefer direct co-investments but will consider investing in renewable funds,” it said.

The manager expects to have around 20 professionals dedicated to renewable energy infrastructure.

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