Norway’s $830bn sovereign wealth fund needs to diversify its investment exposure, with returns dwindling and spending increasing over recent years, according to Oeystein Olsen, governor of Norges Bank, which manages the Fund.
Norges Bank was charged with managing the Government Petroleum Fund when the first capital transfers were made to the Fund in 1996, with the aim of ensuring Norway’s income and oil and gas resources will continue to accrue to future generations.
The real return on the Fund can be used over time for consumption or investment, ensuring a gradual phasing-in of petroleum revenue spending, while preserving the wealth. However, in recent years the Fund’s historic return of four per cent has slipped.
With investment guidelines set by the state, Olsen urged the government to broaden its investment opportunity, pointing to a “persistent fall in yields”.
He said, “Looking ahead, low long-term interest rates will feed through into lower returns. It is doubtful that equity prices will continue to advance at the same pace as seen in the past couple of years. The most likely scenario is still one where the Fund’s real return will approach three per cent in the longer term.”
Olsen added, “To achieve returns, we must take on risk. The Fund features a very long investment horizon and a sizeable capacity to bear short-term risk. If we can exploit these distinctive features when making investment choices, it should be possible to obtain a return in excess of average market return.”
In recent years, the Fund has also invested directly in real estate. The mandate provides for an increase in the real estate allocation up to five percent, while the allocation to fixed-income instruments is to be reduced from 40 per cent to 35 per cent.
The government is currently reviewing the fund and expects to present a white paper to parliament this spring that could call for it to be broken up into smaller, more specialized entities. It may also confirm that the fund’s investment horizon is broadened beyond stocks, bonds and real estate.
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