By Joanna Chung in London
September 18, 2006
SourceNorway’s vast state pension fund, which invests the country’s oil wealth, is considering investments in riskier assets in search of higher returns, the central bank governor said on Monday.
“The investment strategy has so far aimed at low return volatility, perhaps to a larger extent than is reasonable for a fund that is meant to be permanent,” said Svein Gjedrem, governor of Norges Bank, which manages the $248bn fund.
“The strategy is currently under review by the Ministry of Finance and there may be changes under way.”
Mr Gjedrem’s comments, prepared for delivery at the meeting of the International Monetary Fund and the World Bank taking place in Singapore, underscores a global trend among many big investors, including Europe’s central banks, re-examining their investment policies to boost returns.
Richard Woodworth, economist at Merrill Lynch, said that the strategy review by Norway was also “in line with the trend we are seeing in the private sector, of a greater willingness to take on risk to increase long-term returns”.
But any shift in strategy by Norway’s state pension fund towards alternative assets, including real estate, private equity and hedge funds, could have widespread ramifications for the world’s financial markets.
The fund invests about 40 per cent of its assets in equities and 60 per cent in fixed-income instruments in a broad range of non-Norwegian markets in Europe, the Americas and Asia.
Since 1996, the Government Pension Fund, formerly known as the State Petroleum Fund, has stashed Norway’s petrodollars overseas. The fund is meant to be a nest egg for future generations.
Norway’s strategy of investing in non-Norwegian markets has also helped the country ward off the so-called Dutch disease, in which a surging currency suffocates other industries and hurts competitiveness.
In the first half of the year, the return on the Government Pension Fund was 0.7 per cent. But measured in Norwegian krone, the return was negative 3.1 per cent, due to the currency’s appreciation against currencies in the benchmark portfolio.
However, since Norges Bank Investment Management (NBIM), the investment arm of the central bank, was set up in 1998, returns have beaten the benchmark in 25 out of 34 quarters, said Mr Gjedrem.
He added that, on average, the NBIM had earned exactly half a percentage point higher return per year than the benchmark portfolio. In nominal terms, that adds up to somewhere between $4bn and $5bn in extra earnings since 1998.
Copyright The Financial Times Limited 2006