NORWAY – Losses from the Norwegian Pension Fund Global’s substantial exposure to Japanese and US government bonds, comprising close to one-third of its fixed income portfolio, saw the NOK4.4trn (€557bn) fund return just 0.1% in the second quarter of the year.

Publishing its quarterly report for the three months to June, the fund said its government bond portfolio returned -2%, worse than the overall 1.4% loss seen across its fixed income holdings.

The returns were also a marked decline over the year’s first quarter, when fixed income returned 1.1% and overall returns stood at more than 5%.

Yngve Slyngstad, chief executive at Norges Bank Investment Management (NBIM), also confirmed the fund would continue to strengthen its active ownership policies with the launch of a separate Corporate Governance Advisory Board.

Despite the losses from its fixed income portfolio, the fund saw 0.9% returns from its equity investments and nearly 4% from its real estate holdings.

“Equity returns were boosted by strong markets in the US and Japan, while emerging markets pulled in the other direction,” Slyngstad said. “Fixed-income returns were undermined by a rise in global yields.”

The report singled out the telecoms sector as offering the best returns over the quarter, although it said its holdings in Microsoft made the single-largest contribution to returns over the period.

Aided by Japanese prime minister Shinzō Abe’s new economic policy platform, the fund’s Japanese equity holdings returned 4.6%, well above the -4.2% return from Asian stocks as a whole or losses of nearly 6% incurred from its emerging market exposure.

“This was due partly to market expectations of weaker economic growth in China,” the report said.

“In addition, central banks in a number of emerging markets, including Indonesia and Brazil, tightened monetary conditions.”

Expectations that central banks would tighten previously expansionary monetary policy was also blamed for the negative results seen in the fixed income portfolio, accounting for 60% of the fund’s assets.

The fund’s NOK365bn holding of US Treasury bills returned -1% as a result, while its Japanese government bond holdings, accounting for more than 8% of its fixed income portfolio, returned -5.9%.

However, 1.6% returns from euro-zone government debt were able to ensure inflation-linked bonds remained the worst-performing asset class, 1.4% percentage points behind government debt’s -2% return.