Norway’s giant former oil fund has cut its return forecast and plans to increase its equity allocation to 70%, according to government plans unveiled yesterday.
The NOK7.5trn (€846bn) Government Pension Fund Global (GPFG) reduced its expected return to 3% from 4%. The expected rate of return has been at 4% since 2001.
In a news conference, Norway’s finance minister Siv Jensen explained the decision to raise the share of equities in the sovereign wealth fund’s strategic benchmark index, saying the expected return on equities was more than that of bonds, so the move would support the aim of increasing the fund’s purchasing power.
“At the same time, equities carry higher risks,” she added. “The proposal to increase the equity share is based on a comprehensive assessment of the recommendations received.”
Broad political support had been a prerequisite for increasing the equity share – currently 62.5% – she said, as had the ability to adhere to the chosen investment strategy in periods of market turbulence.
All in all, said Jensen, the government considered an equity share of 70% to carry acceptable risk.
“The downwards revision of the return estimate underpins the long investment horizon of the fund, a prerequisite for holding a high share of equities,” she added.
In October, the Mork Commission told the Norwegian government that the GPFG should up its equity allocation to 70%, adding that the expected real rate of return for the overal portfolio was considerably less than 4%.
However, in December, Norges Bank — which manages the fund — recommended to the government that the equity share be lifted to 75%.
The government will now submit the proposals to parliament.
Under Norwegian fiscal rules, spending of revenues generated by petroleum activities and GPFG’s investments should correspond to the sovereign fund’s expected real rate of return. However, despite the proposed revision to this figure the government did not propose changing how much of the GPFG’s revenue the government can spend.
Prime minister Erna Solberg told the news conference: “The government’s proposals will support a continued, responsible management of the considerable oil and gas resources. The proposed changes strengthen the fiscal framework we have for managing petroleum revenues.”
This would help make sure that future generations could benefit from these revenues, she added.