NORWAY - Europe's largest pension fund, the NOK2136bn (€267bn) Norwegian Government Pension Fund - Global, has said it will switch 5% of its asset to real estate, while moving more money into emerging markets.

Finance minister Kristin Halvorsen has announced a review of the fund's investment strategy has prompted the ministry to include real estate as a separate asset class, which will be offset by a reduce allocation to fixed income, from this year.

The fund will also increase its allocation to emerging markets from 5% to 10% and plans to expand the benchmark portfolio for equities to include more emerging markets, including China, the Czech Republic, Egypt, Hungary, India, Morocco, Pakistan, Peru, Poland, the Philippines, Russia, Thailand and Turkey.

"Investing a portion of the fund in real estate is expected to improve risk diversification and enhance returns," said Halvorsen on Friday, in the annual white paper report to Parliament on the management of the fund.

She added: "Including more emerging markets in the benchmark is expected to improve risk diversification, and the benchmark portfolio will better reflect developments in global stock markets."

The ministry said it intends to raise the fund's limit on ownership stakes in individual companies from 5% to 10%, though "this does not alter the fund's role as a financial investor," read an announcement by the ministry.

Next to this, the ministry will evaluate the pension scheme's ethical guidelines and strengthen the ethical profile of the fund.

The Ministry intends to circulate a discussion paper on the ethical guidelines this spring as part of a broad public consultation process, which will be submitted in the spring of 2009.

The government has also said it has now chosen to implement a prohibition on investing in companies selling arms or weapons technology to a country whose sovereign bonds are excluded from the investment universe.

"This means that the fund shall not invest in companies selling arms to the Burmese regime," said the ministry, though adding that a preliminary review suggests that there are currently no such companies in the fund's portfolio," said the ministry.

Last month, the 2007 annual report from Norges Bank Investment Management (NBIM) revealed the annual return of the fund was 0.22 percentage points below the benchmark portfolio defined by the Ministry of Finance. (See earlier story: Norway misses pensions benchmark with 4.3%)

The fund returned 4.3% in 2007, which is the first time the fund has achieved lower returns than its benchmark portfolio since 1998.

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