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Abu Dhabi, UAEMonday 24 September 2018

Norway joins the $1 trillion fund club

The milestone valuation of the nations sovereign wealth fund was reached for the first time on Tuesday

Siv Jensen, Norway's minister of finance, at the Norwegian Aker BP platform on the Valhall oilfield in the North Sea. Norway's sovereign wealth fund, the largest in the world, has hit $1tn for the first time. Hakon Mosvold/ EPA
Siv Jensen, Norway's minister of finance, at the Norwegian Aker BP platform on the Valhall oilfield in the North Sea. Norway's sovereign wealth fund, the largest in the world, has hit $1tn for the first time. Hakon Mosvold/ EPA

Norway’s sovereign wealth fund has hit US$1 trillion for the first time, driven higher by climbing stock markets and a weaker US dollar.

The milestone valuation was reached for the first time on Tuesday, September 19 at 2:01am in Oslo, Norges Bank Investment Management.

“I don’t think anyone expected the fund to ever reach $1tn when the first transfer of oil revenue was made in May 1996,” said Yngve Slyngstad, the chief executive of the fund. “Reaching $1tn is a milestone, and the growth in the fund’s market value has been stunning.”

But the extreme wealth, about equal to the GDP of Mexico, isn’t unalloyed good news.

The fund’s sheer size has made it a challenge to find markets big enough to invest in. Meanwhile, Norway’s politicians are finding it hard to resist the temptation to raid the world’s biggest state piggy bank, with the petro-dollar addiction threatening to overheat the $400 billion economy.

It has few rivals in terms of size. Japan’s Government Pension Investment Fund was valued at $1.3tn at the current exchange rate) at the end of March. China, of course, has about $3tn in currency reserves. There are also big cash-piles at money management firms such as BlackRock’s $5.7tn and Vanguard Group’s $4.4tn.

Slyngstad recently suggested it’s now largely fruitless for it to enter new asset classes such as infrastructure because that would be costly and only deliver a blip on overall returns. The investor is also retrenching its global bond portfolio, cutting 23 currencies down to just three -- the dollar, the euro and the pound. The fund says it doesn’t make sense to have more diversification in a world in which prices and rates are converging.

Its huge size has also driven the fund to respond to problems with trading by devisingelaborate strategies to hide its selling and buying from anyone seeking to front-run its activities.

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But being big has its advantages, especially for a lean organisation like Norges Bank Investment Management. The fund only employs about 550 people in offices across the entire globe (Oslo, New York, London, Shanghai and Singapore). Management costs were equal to just 0.02 per cent of assets in the most recent quarter, down from 0.07 per cent five years ago.

The decline in costs comes despite the fund’s expansion into real estate. It’s snapped up prime properties in Times Square, the Champs Elysees and London’s Regent Street, among other locations. It owned 200bn kroner (Dh95.51bn) in real estate at the end of June.

For now, there’s been little discussion about breaking the fund up into smaller, more nimble entities, though the government is currently pondering a proposal to shift it out of the central bank and strengthen oversight.

So what lies ahead? Norway expects the fund to keep growing through 2025, when it’s predicted to hit $1.3tn at today’s exchange rate. But such estimates are notoriously unreliable. Its current size already exceeds the milestone it wasn’t expected to reach until 2018.

With interest rates at record lows and returns hard to come by, the fund’s management is growing less optimistic. The central bank governor Oystein Olsen has warned the decline in oil prices means the fund may already have passed its peak.

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 70bn kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 per cent from 4 per cent.

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

But Mr 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 per cent of global stocks.

Norwegian finance minister, Siv Jensen, on Tuesday also praised the fund for its “good management” and pledged a stable political climate as she prepares for another four years in power after securing reelection last week.

“The fund’s value has increased by 3tn kroner in the past four years,” she said. “The guidelines for fiscal policy should secure that the fund is to the benefit of current and future generations.”

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