Norway’s Global Government Pension Fund, the biggest sovereign wealth fund in the world by assets under management, has formally started the process of shifting the way it goes about business.
Late on Thursday afternoon, the Norwegian government proposed investing 70% of the country’s £723 billion fund in the equity markets. Currently, the fund has the ability to put just over 60% into stocks.
Increasing the allocation could shift as much as £70 billion into equities from its fixed income portfolio.
“The government’s proposals will support a continued, responsible management of the considerable oil and gas resources. Norway has been fortunate, but the petroleum wealth has also been managed well. The proposed changes strengthen the fiscal framework we have for managing petroleum revenues,” the government said in a statement.
The move is part of a strategy from Norway’s sovereign wealth fund to find new ways to make money given the rock-bottom yields most developed-market government debt has right now, and following the crash in oil that has seen prices for the world’s most important commodity crash from more than $US100 per barrel to just more than $US50 now, having briefly dropped below $US30 in early 2016.
“The expected return on equities exceeds that of bonds, thus supporting the aim of increasing the Fund’s purchasing power. At the same time, equities carry higher risks. The proposal to increase the equity share is based on a comprehensive assessment of the recommendations received,” the government statement continues.
Rock-bottom global bond yields are making things incredibly tricky for fixed income investors, as interest rates close to zero all around the world continue to bite. The eurozone, Switzerland, Sweden, Denmark, and Japan all already have negative interest rates, and rates in most other developed markets are pretty close to zero. In the UK, the rate is 0.25%, while in the USA it is 0.5%.
Low interest rates generally mean low yields on bonds, meaning that the fixed-income market is not one where there is much money to be made right now, and that has helped drive the recommendation to move more money into stocks.
If the government’s proposals are approved, there is likely to a noticeable impact on the global markets, given that the fund owns 2.3% of all equity in listed European companies, and 1.3% worldwide. In the UK for example, the fund has invested almost £50 billion in stocks, spread across 457 different companies, according to the most recent data released.
Proposals for the change were first put forward in October 2016, when a government-commissioned report made the 70% recommendation, but it is now set to be formally adopted as policy.
Alongside the proposed compositional changes, the government is also suggesting that the expected return of the fund should be lowered from 4% to 3% in the future. “Returns are likely to be lower going forward,” the Norwegian government said.