The manager of Norway’s giant former oil fund, the Government Pension Fund Global (GPFG), has told the government it believes the equities allocation should be lifted by around one-quarter from the current shares weighting, to 75%.
It would be 5 percentage points more than an official commission advised just weeks ago.
In a joint letter, Norges Bank governor Øystein Olsen and the deputy chief executive of Norges Bank Investment Management (NBIM) Trond Grande said: “The Bank recommends that the equity share in the benchmark index for the fund be increased to 75%.”
“The adjustment to the new strategic equity share will need to be carried out over a period of time.”
The GPFG is managed by NBIM, part of the Norwegian central bank Norges Bank.
In October, the government-appointed Mork Commission, which convened in January to review the oil fund’s exposure to listed shares and consider different allocations to the asset class, reported to the ministry of finance that the fund should increase its equity allocation to 70%.
At the end of the third quarter this year, the GFPG had 60.3% of its assets in equities but now has permission from the finance ministry to have between 50% and 70% of its resources in the asset class.
It has a limit on its real estate allocation of 5%, though at the end of September, it had only reached an exposure of 3.1% to property – the rest is held in bonds.
The sovereign wealth fund only started investing in unlisted real estate late in 2010.
The finance ministry asked NBIM back in February to see if the relationship between expected return and risk for equities and bonds had changed since the equity share was last reviewed some 10 years earlier, and whether there were reasons to adjust the equity allocation in the fund’s benchmark index.
The allocation to equity in the benchmark has been assessed and revised many times before.
In 1997, it was decided it should be 40%, and in 2006 to 2007, it was increased to 60%.
Between those dates it was reviewed twice but not changed.
In yesterday’s letter, Olsen and Grande told the finance ministry that the yield on inflation-linked bonds – which they said was a good indicator of the expected real return on virtually risk-free bonds – had dropped by nearly 3 percentage points since 2006.
“The expected excess return of equities over bonds is slightly higher than in 2006, but the effect of this change is much smaller than the effect of lower real interest rates,” they said.
This meant, they said, that the fund’s expected real return was much lower today than it was in 2006.
They also argued that the Norwegian state, as the fund’s owner, could now tolerate more risk in the fund than was the case in 2006 because the value of the fund today makes up two-thirds of the state’s petroleum wealth, up from about one-third of it back in 2006.
“Hence, a smaller share of total petroleum wealth is now directly exposed to movements in oil and gas prices and to specific risks relating to the production of oil and gas on the Norwegian continental shelf,” they said.