Norway’s $880 billion sovereign wealth fund is being urged to invest more of its portfolio in stocks. Who might be urging the world’s largest fund to boost its stock allocation more than seven years into a bull market? The Norwegian government.
According to a government-commissioned report, the Norwegian sovereign wealth fund should invest 70% of its assets in stocks, up from 60% today, which itself is up from 40% in 2007.
Why has the Norwegian government gone googly-eyed for stocks? The Financial Times offers some insight.
“With a higher share of equities the expected return will increase as will the income to the government budget. Yes, it comes with higher risk but we think we are well equipped to handle this risk,” Hilde Bjornland, an economics professor behind the recommendation, told the Financial Times.
The centre-right government will evaluate the recommendations before setting out its own position in the spring. Senior insiders said they expected the allocation change to go through as the report was co-authored by two former finance ministers.
Siv Jensen, the finance minister, told the Financial Times: “We are always thoroughly evaluating how we are running the fund … We know now that we have a very low interest rate regime globally. We have 40 per cent in bonds, and that will affect the return over time.”
Saker Nusseibeh, chief executive of Hermes Investment Management, a UK asset manager, said there was a broader trend of investors looking to increase their equity exposure. “This is about the realisation that you cannot make returns of the same amount that you used to make in the past,” he said.
He added: “If you are a sovereign wealth fund … you will question why you would have so much in fixed income at all.”
The latest survey of fund managers from Bank of America Merrill Lynch shows a rise in cash holdings, which in part reflects “scepticism or outright fear of bond markets”, according to Jared Woodard, an investment strategist at the bank.
So in other words, Norway is saying we can’t earn enough in the bond market to meet our budget obligations so we are going to roll the dice in the stock market. That doesn’t sounds like it is going to end well.
It is never advisable to reach for return. Always evaluate risk and your tolerance to take risk before worrying about potential return.