Norway wealth fund urged to bulk up on shares

Norway's central bank on Thursday recommended the nation's public pension fund, the world's largest sovereign wealth fund, invest more in shares and less in bonds to boost performance. The central bank, which manages the fund on a day-to-day basis, suggested the fund should lift its shares from 60 percent of its portfolio to 75 percent, in a proposal submitted to the government. With the fund's current value of 7.27 trillion kroner (809 billion euros), such a redistribution would entail purchasing 1.09 trillion kroner (121 billion euros) of additional shares.
Investors have been piling out of bonds since the unexpected victory of Donald Trump in the US presidential election last month. His plan to cut taxes and step up investment in public infrastructure has lifted inflation expectations, thus eroding returns for those already holding bonds. Meanwhile it has boosted expectations of growth which would benefit company earnings.
The Norwegian government is currently working on a policy paper on the fund's strategy, which will be presented early next year. Parliament will have the final say on the matter. Set up to finance the future expenditure of the generous Norwegian welfare state, the central bank's current mandate is to invest 60 percent in shares, 35 percent in bonds and five percent in real estate investments. In a letter sent to the finance ministry, the fund estimates that by raising the weight of shares to 75 percent, it could achieve an annual real return of 2.5 percent over the next 10 years and three percent over 30 years.
By keeping the shares at 60 percent, the fund estimates these figures to be 2.1 percent and 2.6 percent respectively, because of the poor performance expected for bonds. Between 1998 and 2015, the annual return, after inflation and management costs, averaged 3.7 percent. However, increasing the weight of shares in the portfolio would increase risk-taking and would lead to greater volatility of the fund, the central bank warned. It would therefore have budgetary implications as the government is allowed to use up to four percent of the fund's value annually to balance its accounts. In October, a group of experts mandated by the government called for the amount of shares to be increased to 70 percent, although its leader, economist Knut Anton Mork, said shares should be reduced to 50 percent.