Phillips Petroleum in Norway is looking for investments beyond the domestic bond market, because of the relatively flat prospects for growth this year, but it currently holds the maximum allowed for domestic and in-ternational equity portfolios.
The fund, which manages approximately $200m, has 70% of its holdings in domestic bonds, with 5% split be-tween mortgage lending and cash and the remaining 25% divided roughly into two thirds international and one third domestic equity.
The key in a bull market, acc-ording to Peder Bruce, deputy director tax and treasury at Phillips Petroleum, is to determine how much growth is left. He expects the Norwegian equity market to make a 15- 25% move this year with 10% already taken up. In the international equity market growth is expected of 10-15%.
For domestic bonds, we see a market move of 7 or 8%. It is a couple of percentage points lower on the international markets,” he says. He still sees some potential for growth. “A flat bond market puts a bigger demand on the portfolio managers to pick up yield. There is still something to gain on the domestic bond side but it is going to be on a very selective basis.”
He adds that in the general interest market, levels are close to the bottom although the picture internationally is even less promising.
With liquidity pouring into the equity market, the fund’s holdings in both domestic and international are at a maximum. “The Norwegian SEC prohibits us from extending these holdings further even if we wanted to, but we might look for alternative investments to the bond portfolio because we don’t see much scope in the interest rate market for the next year or so.”
Within the equity market, Bruce believes that the best performing sector will continue to be industrials, ex-pecting very good earnings growth in service industries related to offshore oil. On a selective basis he also expects growth in the hi-tech sector.
The clouds on the horizon are inflation and the strength of the Norwegian currency. The Norwegian economy is currently the outstanding success within Europe, but he warns: “We are on a difficult edge in Norway relating to the inflation scenario.”
The impact of the strengthening currency on export in-dustries is a concern. “It is something that we will keep a very close eye on when evaluating international investments against domestic investments for the next 12 months.
“It seems that the Norwegian central bank has overplayed its role in the Norwegian kroner market for now, so it is the speculators who will decide where the kroner is going. I think we have to sit on the sidelines for a little bit.”
The key issue appears to be asset allocation. The situation became more flexible last year, explains Bruce. “The SEC has moved from an absolute limit on the different asset classes to a recommended asset allocation based on responsibility. Responsibility and control are its two biggest buzz words “
The SEC is particularly prepared to exercise the latter when it concerns international equity, currency hedging and derivatives. Bruce concludes: “All these issues have to be dealt with in a res-ponsible, prudent and controllable manner.”“