Norway eyes $100bn US tech stock spree in further shift from Europe

By Sveinung Sleire and Mikael Holter

Norway’s €900bn sovereign wealth fund has proposed overhauling how its holdings are placed across the globe, calling for a shift away from Europe. The move would allow it to boost its US holdings by as much $100bn (€90bn) and take a larger chunk of the biggest technology companies.

In a letter to the country’s finance ministry, Norway’s central bank — which manages the fund — said its holdings “should be adjusted further, towards float- adjusted market weights, by increasing the weight of equities in North America and reducing the weight of equities in European developed markets.”

The response comes after the finance ministry, last year, asked the fund to review the geographical weighting that had been in place since 2012. The ministry, this week, said it would present its response in the “spring of 2020” and that any changes would be implemented gradually.

The fund — the world’s largest in value terms — is overweight in Europe to better match Norway’s trade flows, but this has been questioned since it has missed out on the bigger returns in US markets. A change could set off an investment spree in US stocks, including in technology giants such as Microsoft, Apple, and Amazon, which are already the fund’s largest holdings.

“Equities make up the majority of the investments in the GPFG [Government Pension Fund of Norway] and it is important that the framework for these investments is appropriate and updated,” Norwegian finance minister Siv Jensen said.

The current set-up gives European stocks a factor of 2.5 and a share of 33.8% of the portfolio. North American stocks only have a factor of 1, so despite being a bigger market, they only have a share of 41.2%. Asia and Oceania, and emerging markets, have a bigger factor of 1.5 and shares of 14.6% and 10.1%, respectively.

US stocks are already the fund’s biggest holdings, with $245bn at the end of 2018. If it were to move to float- adjusted market weights, that would jump to $345bn. The biggest reduction would come in UK stocks, where the share would be cut to about 5%, from 9% now.

A potential shift in geographical weights will be the latest in a string of big changes for the fund, which recently raised its equity holdings to 70%, decided to dump emerging market debt, scaled down plans for real estate, and is starting to invest in renewable energy infrastructure.

The fund’s current, regionally adjusted index has had an annual return of 9.2% since 2003, while a float-adjusted market weight index has returned 9.3% Last week, Norway’s wealth fund reported that it delivered a return of 3%, or 256bn kroner (€25.6bn), in the second quarter of the year, led by a 3.1% return on bonds. Its stocks rose 3% and its real estate holdings 0.8%.

The Oslo-based fund, which holds 1.4% of global stocks on average, closely mirrors the broad markets, though it has some leeway in how it weighs indexes and strays from its benchmarks. The fund snapped up stocks in a sell-off at the end of last year, hitting a new, long-term target of holding 70% in equities.

The fund said it now has a record of 600bn kroner (€60bn) in bonds with negative yields, or about a quarter of its fixed-income portfolio. Rock-bottom rates forced it in 2017 to cut its return target to 3% from 4%.

The fund also, this year, received approval from Norway’s government to overhaul its bond holdings to cut emerging markets. The fund argued it makes little sense in owning government bonds across the world, since they have become more correlated and that it’s also exposed to a wide array of currency risk through its ballooning stock holdings.

Emerging markets slid to 7.9% of the bond portfolio, from 8.1% at the end of the first quarter, with the biggest decline seen in Mexican debt.

Bloomberg