Norway's Giant Wealth Fund Slows Investment in Emerging Markets

Wednesday, 20 Aug 2014 06:40 PM

 

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Norway’s $880 billion sovereign wealth fund, the world’s largest, is slowing its expansion into emerging markets as it scales back a two-year mission to tap into the fastest growing markets.

“We are gradually picking up some new markets but at a less rapid pace than we did at the beginning of the year,” Yngve Slyngstad, the fund’s chief executive officer, said Wednesday in an interview after a press conference in Oslo.

The fund has been pouring into emerging markets since 2012, when it won permission to step up its investment. At the time, the government approved a plan to reduce holdings in Europe to 41 percent from 54 percent of the total portfolio.

Slyngstad said the fund hasn’t been trading Russian assets over the past eight months as it monitors the effects on the economy of sanctions. Norway, which isn’t a European Union member, has chosen to back U.S. and EU trade restrictions against Russia.

“Our investment strategy for any country that sees the kind of turbulence, geopolitical risk, whatever you want to call what we have at the moment — we will neither be buying nor selling,” he said. “This isn’t a situation that lends itself to our set strategy of investing more when we see volatility.”

Protecting Wealth

After getting its first capital infusion 18 years ago, the fund has steadily added risk, expanding into stocks in 1998, emerging markets in 2000 and real estate in 2011 to safeguard the wealth of the world’s seventh-largest oil exporter.

At the end of June, 9.9 percent of the fund’s stocks and 13.4 percent of its bonds were in emerging markets.

The investor still sees China as a target for more purchases and will try to raise holdings under the country’s qualified foreign institutional investor quotas program, Slyngstad said.

“We’re investing in countries roughly in proportion to the size of the underlying economy. On that relative basis, we are under-invested in China,” he said.

While the fund’s investment in China accounted for 2.4 percent of the total equity portfolio and was its largest stake in emerging markets, Slyngstad said holdings in China are “miniscule relative to the size of its economy.”

Under China’s existing rules, only overseas institutions that have been awarded licenses and quotas by two different regulatory bodies can invest in A shares. The combined approved quota of about $86 billion is less than 3 percent of the $3.3 trillion market value of locally-listed companies.

Shifting Holdings

As part of a strategy to shift its holdings to capture a larger share of global growth, the fund in June unveiled plans to target more frontier markets as part of a three-year plan. It’s working to reduce the share of European stocks in its portfolio to 40 percent from the current 46 percent, Slyngstad said yesterday.

The investor, which owns 1.3 percent of the world’s stocks, has missed a 4 percent real return target since it started investing in the late 1990s.

The fund reported a 3.3 percent return in the second quarter, boosted by a rally in emerging market stocks. A 7.4 percent increase the fund booked in emerging market stocks was led by gains in India, Russia, Turkey and Brazil. Developed markets rose 3.7 percent, while its Chinese stock holdings returned 3.2 percent.

Since the establishment of Norges Bank Investment Management in 1998, the fund has had a real annual return of 3.75 percent and a nominal return of 5.83 percent.

“We’ve had several very good years for the fund,” Slyngstad said, adding that “the good times” will probably not continue. “The fund cannot continue to increase at this pace.”

© Copyright 2014 Bloomberg News. All rights reserved.

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