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Norway's $1 Trillion Wealth Fund Gains 3.2% In Q3 As 70% Equity Allocation Pays Off

Last December we joked that the Norwegian sovereign wealth fund had responded to sinking returns and withdrawals required to fund budget deficits by allocating another $130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns" (see: Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash).  The extra equity purchases pushed the fund's total equity allocation to a staggering 70% of their $860 billion in assets under management.

Alas, with global equity bubbles becoming ever more bubblier with each passing day, the bet on equities has paid off 'bigly' for Norway so far this year and grew their $1 trillion in AUM by another 3.2%, or a mere $32 billion, in Q3 2017 alone. 

As Bloomberg notes this morning, the staggering size of Norway's wealth fund and their seemingly reckless allocation to equities, implies they now own roughly 1% of global stocks.

Norway’s sovereign wealth fund, which owns more than 1 percent of global stocks, is treating its $300 billion bond portfolio as a hedge for what it now essentially views as a stock fund.

 

“60 to 70 percent in equities -- imagine it was 60 to 80 or 90 percent -- the whole thing is that this fund is actually to a large extent now a public equity fund,” CEO Yngve Slyngstad told reporters in Oslo. “We don’t think about this as two separate asset classes that have their distinct dynamics, the real risk of the fund is in the equity market.”

 

The $1 trillion Government Pension Fund Global, which started out as a pure bond portfolio before adding stocks, returned 3.2 percent in the third quarter, or 192 billion kroner ($24 billion), the Oslo-based investor said on Friday. Equities drove returns gaining 4.3 percent, while bonds rose 0.8 percent and real estate investments grew 2.7 percent.

So what does Norway's wealth fund own?  Aside from the obvious answer of "literally all the things," they have roughly $360 billion in U.S. stocks, with Apple being their largest bet of course and $100 billion in emerging market equities with the remainder spread between Euro equities and U.S., Japanese and German bonds.

Emerging stocks, which make up 10.2 percent of the fund’s equity holdings, returned 6.4 percent, while U.S. stocks, its single largest market with 35.9 percent, returned 3.2 percent. Oil and gas shares were the best preforming sector in the quarter with a 8.7 percent increase as increased demand for oil, OPEC’s quota discipline and lower production of shale oil in the U.S. boosted crude prices, the fund said.

 

Owning close to 1.5 percent of all large listed companies globally, the Norwegian fund largely follows indexes, but is allowed some active management of its portfolio.

 

The fund held 65.9 percent in stocks in the quarter, 31.6 percent in bonds and 2.5 percent in real estate. Its mandate is 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 fund beat its benchmark by 0.1 percentage point.

 

The fund’s biggest equity investments in the quarter are Apple, Nestle and Royal Dutch Shell, while its largest fixed income holdings are U.S., Japanese and German government bonds.

Meanwhile, the fund's record AUM comes despite taking withdrawals for the first time ever in 2016 and expectations that another 70 billion kroner will be withdrawn this year to help offset budget deficits.

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

 

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

 

But 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 percent of global stocks.

So, it appears that Norway's reckless equity bet has paid off for now...but, what is the saying about 'he who laughs last?'