Norway’s huge sovereign wealth fund, the world's largest, proposed overhauling its global holdings, calling for a shift away from Europe in a move that would allow it to boost its US stock investments by as much $100 billion (Dh367.25bn) and take a larger chunk of the biggest technology companies.
In a letter sent to the finance ministry released on Tuesday, the $1 trillion fund recommended that its investments “be adjusted further towards float-adjusted market weights by increasing the weight of equities in North America and reducing the weight of equities in European developed markets”.
The response comes after the ministry last year asked the fund to review the geographical weighting that had been in place since 2012. The ministry on Tuesday said it would present its response in the “spring of 2020” and that any changes would be implemented gradually.
The fund is overweight Europe to better match Norway’s trade flows, but this has been questioned since it has missed out on the bigger returns in US markets. A change could set off an investment spree in US stocks, including in technology giants such as Microsoft, Apple and Amazon.com, which are already the fund’s largest holdings.
“Equities make up the majority of the investments in the GPFG and it is important that the framework for these investments is appropriate and updated,” finance Minister Siv Jensen said.
The current set-up gives European stocks a factor of 2.5 and a share of 33.8 per cent of the portfolio. North American stocks only have a factor of 1, so despite being a bigger market they only have a share of 41.2 per cent. Asia and Oceania and emerging markets have a bigger factor of 1.5 and shares of 14.6 per cent and 10.1 per cent, respectively.
US stocks are already the fund’s biggest holdings, with $245bn at the end of 2018. If it were to move to float-adjusted market weights, that would jump to $345bn. The biggest reduction would come in UK stocks, where the share would be cut to about 5 per cent from 9 per cent now.
A potential shift in weights will be the latest in a string of big changes for the fund, which recently raised its equity holdings to 70 per cent, decided to dump emerging market debt, scaled down plans for real estate, is divesting some oil stocks and is working on starting to invest in renewable energy infrastructure.
The fund’s current regionally adjusted index has had an annual return of 9.2 per cent since 2003, while a float-adjusted market weight index has returned 9.3 per cent.
The recommendation to move toward market weights isn’t based on any market outlook for future returns but “a structural evaluation”, said Egil Matsen, the deputy governor at Norway’s central bank, who’s in charge of overseeing the fund.
He also said it made a conscious choice not the recommend specific weights since there are a lot of risk factors for the ministry to consider when it decides.
In Norway, there’s a debate on whether the country’s overall risk should be considered when setting investment guidelines, which was a major factor in the fund’s decision to recommend divesting oil and gas stocks.
In fact, one the bank’s board members, Kjetil Storsletten, introduced a “special remark” in the letter, agreeing that the advice works if the fund is considered in isolation but changes when a broader perspective is taken on the nation’s wealth.
“This perspective indicates that higher weights should be assigned to countries and markets with a lower correlation with Norwegian government revenue and Norwegian economic output, and lower weights to countries and markets that move more closely in line with Norwegian income,” he said.
