NORWAY - The Norwegian Pension Fund Global (NPFG) is to amend its investment regulations, allowing for exposure to emerging market sovereign debt as it seeks to diversify its holdings into the Americas and Asia.

As a result of the proposed changes, the country's NOK3.418bn (€453bn) petroleum fund said it expected exposure to European debt would decrease, with its fixed income investment strategy linked to a country's GDP rather than the volume of debt issued.

In the governor's annual address in Oslo yesterday, Norges Bank's head Øystein Olsen criticised euro-zone economic policy, noting that countries within the single currency only broke public and sovereign debt regulations established as part of the initial Stability and Growth Pact once Germany and France had led the way.

He said that while the country's sovereign wealth fund currently had "considerable" ownership of European holdings - with the investment partially based on Norway's import pattern to function as a method of currency hedging - the result had been weaker returns than if it had sought exposure to non-European markets.

Olsen also noted the challenges facing countries burdened with rising debt and said the "economic geography" of the world was changing.

"While growth in advanced economies has been weak and slowing, growth is robust in Latin America and Asia," he said. "Several countries in Africa are now catching up."

He added: "A more even distribution of the fund's ownership will provide us with the opportunity to take part in the value creation in regions with strong growth.

"This implies a reduction in the allocation to European equities and an increase in the allocation to the Americas and emerging economies."

He said high levels of growth in Asia could also offer "sound" returns, despite current equity prices often already reflecting the increased growth expectations of the East compared to West.

Olsen, appointed governor at the beginning of last year, added that the composition of the NPFG's bond portfolio would also change, as its current index-based approach had demonstrated the associated risks in the wake of the financial crisis.

He said investment would now be based on a country's GDP.

"Moreover, it has been proposed that government debt issued by emerging countries also be included in the portfolio," he said.

"The consequence of this is the same as for the equity portfolio - that is to say, a reduction in the fund's European holdings."

Striking a bullish note regarding equity markets, he said that while he expected an extended period of lower returns, over time, the stock market would offer better returns than bonds.

However, despite Norges Bank Investment Management increasing NPFG's equity exposure over the past few years, he dismissed the notion of a riskier investment strategy, despite its potential benefits.

"A bolder investment strategy could compensate for low interest rates, although the risk of substantial losses would also increase," he said. "This is hardly a tempting path."

As of the end of September, NPFG invested 55.6% in equities, 44.1% in fixed income and 0.3% in real estate as part of its drive to expand into real assets.