Norway"s $1 Trillion Wealth Fund Gains 3.2% In Q3 As 70% Equity Allocation Pays Off

Last December we joked that the Norwegian sovereign wealth fund had responded to sinking returns and withdrawals required to fund budget deficits by allocating another $130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns" (see: Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash).  The extra equity purchases pushed the fund"s total equity allocation to a staggering 70% of their $860 billion in assets under management.

Alas, with global equity bubbles becoming ever more bubblier with each passing day, the bet on equities has paid off "bigly" for Norway so far this year and grew their $1 trillion in AUM by another 3.2%, or a mere $32 billion, in Q3 2017 alone. 

As Bloomberg notes this morning, the staggering size of Norway"s wealth fund and their seemingly reckless allocation to equities, implies they now own roughly 1% of global stocks.

Norway’s sovereign wealth fund, which owns more than 1 percent of global stocks, is treating its $300 billion bond portfolio as a hedge for what it now essentially views as a stock fund.

 

“60 to 70 percent in equities -- imagine it was 60 to 80 or 90 percent -- the whole thing is that this fund is actually to a large extent now a public equity fund,” CEO Yngve Slyngstad told reporters in Oslo. “We don’t think about this as two separate asset classes that have their distinct dynamics, the real risk of the fund is in the equity market.”

 

The $1 trillion Government Pension Fund Global, which started out as a pure bond portfolio before adding stocks, returned 3.2 percent in the third quarter, or 192 billion kroner ($24 billion), the Oslo-based investor said on Friday. Equities drove returns gaining 4.3 percent, while bonds rose 0.8 percent and real estate investments grew 2.7 percent.

So what does Norway"s wealth fund own?  Aside from the obvious answer of "literally all the things," they have roughly $360 billion in U.S. stocks, with Apple being their largest bet of course and $100 billion in emerging market equities with the remainder spread between Euro equities and U.S., Japanese and German bonds.

Emerging stocks, which make up 10.2 percent of the fund’s equity holdings, returned 6.4 percent, while U.S. stocks, its single largest market with 35.9 percent, returned 3.2 percent. Oil and gas shares were the best preforming sector in the quarter with a 8.7 percent increase as increased demand for oil, OPEC’s quota discipline and lower production of shale oil in the U.S. boosted crude prices, the fund said.

 

Owning close to 1.5 percent of all large listed companies globally, the Norwegian fund largely follows indexes, but is allowed some active management of its portfolio.

 

The fund held 65.9 percent in stocks in the quarter, 31.6 percent in bonds and 2.5 percent in real estate. Its mandate is to keep about 70 percent in stocks, 30 percent in bonds, with about 7 percent in real estate that’s now separate from the main portfolio.  The fund beat its benchmark by 0.1 percentage point.

 

The fund’s biggest equity investments in the quarter are Apple, Nestle and Royal Dutch Shell, while its largest fixed income holdings are U.S., Japanese and German government bonds.

Meanwhile, the fund"s record AUM comes despite taking withdrawals for the first time ever in 2016 and expectations that another 70 billion kroner will be withdrawn this year to help offset budget deficits.

Norway’s government last year made direct withdrawals from the fund for the first time in its history and is expected to take out about 70 billion kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 percent from 4 percent.

 

The fund has been given permission to raise its stock holdings to 70 percent from 60 percent, with an equivalent cut in bonds. That could help it eke out higher returns, or at least maintain the 8 percent annualized real return it’s had over the past five years.

 

But Slyngstad also recently said he sees fundamental issues with the global economic system and trade, which is being buffeted by increasing global political risk. And that’s not good for a fund that owns 1.3 percent of global stocks.

So, it appears that Norway"s reckless equity bet has paid off for now...but, what is the saying about "he who laughs last?"

Norway Wealth Fund Gains $53 Billion in 2016 On Trump Rally

After previously announcing plans to withdraw at least $15 billion to fund 2017 budget deficits, the $860 billion Norwegian sovereign wealth fund announced last December that it would change it"s portfolio allocations to try to make up for the withdrawals.  The change would eventually result in 75% of the fund"s capital being allocated to global equities, up from the previous 60% allocation...you know, because equities never go down so more is always better.

Now it seems that, at least for now, that bet has paid off to the tune of about $53 billion or 6.9% of the fund"s AUM.  Meanwhile, the fund"s CEO, Yngve Slyngstad, attributed the gain to the Trump rally saying that "after the presidential election in the U.S., markets priced in higher growth and inflation in the global economy."  Per Bloomberg:

The $900 billion Government Pension Fund Global returned 6.9 percent in 2016, after rising 2.7 percent the previous year, the Oslo-based investor said on Tuesday. Stocks gained 8.7 percent, bonds rose 4.3 percent, and real estate investment grew 0.8 percent.

“The fund returned 6.9 percent after a year of political events and uncertainty,” Chief Executive Officer Yngve Slyngstad said in the statement. “All of the fund’s asset classes generated positive returns, but it was the strong equity return in the second half of the year that drove the fund’s results.”

“After the presidential election in the U.S., markets priced in higher growth and inflation in the global economy,” Slyngstad said.

Of course, the gains came after the Norwegian government was forced to withdraw capital over the past two years to fund budget deficits that are expected to reach over 8% of GDP.

The withdrawals accelerated just as the heavily oil-dependent economy of Norway started to absorb the impact of lower oil prices.

In a previous interview with Bloomberg, Egil Matsen, the Deputy Governor at Norway’s Central Bank, said the withdrawals were starting to impact the manner in which the fund manages its risk profile.   

"Relevant for how we think about the risk-bearing capacity of the fund.  Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?”

But Finance Minister Siv Jensen dismissed criticism of the withdrawals saying that the administration is using the fund as was intended noting that withdrawals remain below the fund"s annual return target of 4%.   

“Now that we are in an extraordinary situation, hit by the biggest oil price shock in 30 years, it would be crazy if we didn’t have an expansionary fiscal policy,” she told Bloomberg. Jensen rejected suggestions that the fund was “vulnerable.” She described it as “rock solid.”

The fund’s managers have warned it’s getting harder to live up to a real return target of 4 percent. It has returned 3.44 percent over the past 10 years. For now, planned withdrawals aren’t big enough to force the fund to sell assets. It estimates income from dividends, real estate and bonds will reach 207.5 billion kroner next year, almost double the amount the government plans to withdraw.

But there is no risk in equity investing, right?  In fact, we just found another $40 billion that will be pumped into the global equity bubble promptly.