Crazy Train: Norway’s Wealth Fund Ordered To Increase Its Stock Holdings

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All aboard the Central Bank Crazy Train!

(Bloomberg) — As many investors question a global stock-market rally that’s now in its eighth year, the world’s biggest wealth fund is prepared to splurge.

Norway’s $970 billion wealth fund has been ordered to raise its stock holdings to 70 percent from 60 percent in an effort to boost returns and safeguard the country’s oil riches for future generations. Any short-term view on growing risks will play little part, according to Trond Grande, the fund’s deputy chief executive.

“We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,” he said in an interview after presenting second-quarter returns in Oslo on Tuesday. The decision to add stocks “was made at a strategic level, on a long-term expected excess return that we’re willing to take risk to achieve. And parliament has said that they wish to spend some time to phase in that increase.”

The fund has doubled in value over the past five years and is continually adding risk to its portfolio. It returned 202 billion ($26 billion) kroner in the second quarter, and 499 billion kroner in the first half, the best on record for the period.

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Owning 1.3 percent of global stocks, the Norwegian fund largely follows indexes but is allowed some active management of its portfolio. It has been expanding more into emerging markets and recently got permission to raise its stock holdings after Norway last year started withdrawing cash from the fund for the first time.

While the investor can look beyond short-term, or even medium-term volatility, it does see potential risks. Chief Executive Officer Yngve Slyngstad in April said that the fund had turned a bit “cautious” on stocks. But in practical terms, that means very little.

“It doesn’t lead to anything in concrete terms, other than the fact that we’re keeping a close eye on the indicators that could indicate whether there’s a risk there, and what they’re saying,” Grande said. “Some risk indicators have actually not shown underlying risk — take growth for example. So you should be a little cautious when the skies are all blue.”

The fund held 65.1 percent in stocks in the quarter, 32.4 percent in bonds and 2.5 percent in properties. Its mandate is now 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 Finance Ministry is currently working on a plan on how to move the portfolio to 70 percent and the fund will stick to that, Grande said.

The fund also indicated it can withstand pressure on its balance sheet from government withdrawals. Norway started taking money out of the fund last year for the first time to cover budget shortfalls after oil revenue slumped. The government withdrew 16 billion kroner in the second quarter, reaching about 36 billion kroner so far. It has flagged it will take out just a little bit above 70 billion kroner.

Norges Bank Deputy Governor Egil Matsen, who’s in charge of oversight of the fund, says it’s liquid and can finance new real estate purchases from a steady income stream.

Of course they can, with the costs of funds from Norway’s Central Bank at 50 basis points.

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Between the various Central Banks, only the US Federal Reserve has raised their target rate recently. But the ECB, Bank of England and Norway’s Norge Bank are all at 50 basis points or lower.

All aboard the Central Bank Crazy Train!!

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