Norway’s $800 billion oil fund is under pressure to show it can handle the risks associated with emerging markets as the world’s biggest sovereign wealth investor looks for ways to boost returns.
The government-appointed Strategy Council yesterday cautioned against underestimating the risk of expanding into emerging markets. The comments come amid concern that unprecedented stimulus from central banks in the biggest economies has skewed asset prices as investors chase yield in riskier markets.
“There’s no doubt that if you put your money into a typical emerging markets portfolio, you are exposed to more irresponsible companies,” Elroy Dimson, a professor emeritus at the London Business School and an adviser to Norway’s Finance Ministry on investment strategy, said in an interview.
The oil fund, which posted its second-best year in 2012, is undergoing a shift in strategy to capture more global growth. That’s involved moving investments away from Europe as emerging markets in Asia and South America make up a bigger share of the world economy. The fund has weighted its bond portfolio according to gross domestic product, after shifting away from a market weighting to avoid nations with growing debt burdens.
The decision brings with it greater responsibility to ensure investments don’t backfire, according to Dimson.
“There’s no guarantee you get it right, so you need to be among the better transactors of that asset class,” he said.
The fund has already felt the sting of buying riskier assets. It lost 5.9 percent on its stock investments in emerging markets in the second quarter. The fund rose 0.1 percent in that period, helped by U.S. and Japanese stocks. It rallied 5 percent in the third quarter.
The MSCI Emerging Markets Index has lost 5.8 percent this year. It fell yesterday for an eighth consecutive day in part as emerging market stocks were weighed down by a typhoon in the Philippines and after a slide in the Indian rupee. The index has soared 74 percent since the end of 2008, the same as the MSCI World Index.
A strategy council of five members, including Idar Kreutzer, the head of Finance Norway, yesterday presented its advice for the oil fund to the government. The group urged the Finance Ministry, which provides guidelines to the oil fund’s managers, to clarify expectations on companies for responsible investments. The group also yesterday recommended that the fund be given responsibility over decisions to exclude companies on ethical grounds, a task now overseen by the Ethics Council.
“Independent, expert advice is an important part of our efforts to develop the fund management further,” Finance Minister Siv Jensen said. “Such advice contributes to transparency and debate about important parts of the management of the fund.”
Norway’s oil fund got its first capital infusion in 1996 and has been taking on more risk as it expands globally. It first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.
The investor held 63.6 percent in stocks at the end of September, up from 63.4 percent in the second quarter. Bond holdings slid to 35.5 percent from 35.7 percent while real estate accounted for 0.9 percent. Dimson said the fund should now be freed to invest in infrastructure.
Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company. Norway is western Europe’s largest oil and gas producer. The fund, which had an average holding of 1.2 percent of the world’s listed companies at the end of 2012, invests abroad to avoid stoking domestic inflation.
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