Norway’s NOK21.7trn (€2trn) sovereign wealth fund could be set to sell around €100bn of government bonds following a proposal from the fund’s manager to change its bonds benchmark to one that more closely resembles the current bond market.
Norges Bank Investment Management (NBIM), which manages the Government Pension Fund Global (GPFG), proposed the move, which would be undertaken gradually, to the country’s government, further advising that the fund buy mortaged-backed securities (MBS) and government-linked debt instead.
On the question of geopolitical and concentration risk for equities, however, the SWF manager said it opposed market or sector caps, but advocated allowing more unlisted assets.
NBIM made the proposal in two letters to the Finance Ministry, in response to its call this spring for advice on future investment strategy.
As part of its follow-up to a wide-ranging report produced by the SWF’s expert council, the ministry instructed NBIM in March to look into geopolitical and concentration risk in the equity benchmark the fund follows – particularly given the heavy weighting to large US technology companies – and assess the SWF’s investment strategy for bonds.
In one of the letters published this morning, NBIM said bond investments – which made up 26.5% of the GPFG at the end of June compared to 72.1% for equities – could be weighted differently to increase the fund’s exposure to risk premiums and increase diversification.
“We recommend that the government sub-index of the bond index be reduced from 70 to 50%,” Norges Bank governor Ida Wolden Bache and NBIM CEO Nicolai Tangen wrote, adding that this would still cover liquidity needs, even in market turbulence.
Given the GPFG’s bond portfolio’s value at the end of June, a 20 percentage point asset allocation change would involve around NOK1.22trn of bonds.
“We further recommend that the government sub-index be weighted by market value instead of GDP, since high government debt is now a general feature of developed economies rather than a distinctive feature of a few countries,” they said.
Figures from NBIM show a shift from GDP weights to market weights for government bonds would slim the SWF’s US government bond allocation to 43.4% from 48.1%, while more than doubling its allocation to Japanese bonds to 15.9% and slightly increasing allocations to both euro-area and UK government debt.
The rest of the bond index should include securitised bonds – largely MBS – and government-related bonds, NBIM advised, saying a broad market index “provides exposure to more risk premiums and gives a more diversified benchmark index than today”.
Currently, NBIM’s bond index only includes government and corporate bonds.
“Norges Bank recommends that the benchmark index for bonds be aligned more closely with the broader market represented by the Bloomberg Global Aggregate,” NBIM said, further advising the duration of the benchmark should continue to follow the market, and that emerging markets remain outside it.
Regarding the equity-related risks in question, NBIM dismissed the idea of introducing caps on individual markets, sectors or companies, saying that in a market-weighted equity index, neither geopolitical not concentration risk could be eliminated.
“Measures that could reduce one form of risk will in many cases entail new trade-offs between the desired risk reduction and increased complexity, higher transaction costs or unintended exposures,” Wolden Bache and Tangen wrote.
However, they advocated an increased allocation to private assets, saying that with a 70% strategic equity share and a “lower share of unlisted investments than comparable funds”, the GPFG was more exposed to developments listed equity markets.
“There may, therefore, be reason to consider whether an increased allocation to unlisted assets over time could give the fund exposure to a broader set of sources of risk and reduce the significance of the concentration in the equity index for the fund’s overall risk profile,” the pair said.
Three years ago, NBIM set out a detailed plan for adding private equity to the fund’s investment mix, but this was rejected in 2024 by the Finance Ministry, which favoured allowing more time to debate the proposals.
