Norway SWF hit by US bond turmoil

 

A fund investing Norway's oil and gas wealth grew 13 per cent in 2007 to above $387 billion though turmoil on international markets hit returns in the second half and the fund underperformed its benchmark for the first time.

The Government Pension Fund - Global, known commonly as the "oil fund," invests in foreign stocks and bonds. It is one of the world's biggest sovereign wealth funds and is meant to save for future generations when the oil and gas run out.

The return on investment for 2007 was 4.3 per cent, but the return in the fourth quarter was a negative 0.6 per cent, the central bank, which manages the fund, said on Tuesday.

The fund's return underperformed the benchmark portfolio set by the ministry of finance by 0.22 percentage point in 2007.

Norges Bank Investment Management (NBIM) manages the fund partly by itself and partly by employing external fund managers.

"External managers with securitised bonds in the United States had the biggest problems," NBIM executive director Yngve Slyngstad told a news conference.

"The turmoil in credit markets triggered by the downturn in the US housing market impacted on results in 2007, especially in the second half of the year," NBIM said.

Until now, Norway's oil-backed economy has been only lightly touched by the US credit crunch and economic malaise, though Norweigan towns lost millions of dollars in US securitised bonds in a scandal that brought down their broker and led to tighter rules about buying complex financial instruments.

Less than a tenth of the lower returns on investments by external managers could be attributed to the subprime crisis, NBIM said, adding that exposure to subprime instruments was only 0.7 per cent of securities managed externally.

"NBIM's active management made a negative contribution for the first time," it said. "The negative excess return in 2007 was 0.22 percentage point."

The average annual excess return during NBIM's 10-year history has been 0.40 percentage point.

SOARING OIL PRICES

The fund grew to 2.019 trillion Norwegian crowns ($387.4 billion) by the end of the fourth quarter from 1.932 trillion at the end of the third quarter and from 1.784 trillion at the end of 2006, the central bank said.

The fund is worth about $81,000 per capita of Norway's 4.74 million population. It has billowed in recent years due to soaring prices for Norway's oil and gas exports.

The bank's balance sheet, which gives a fairly accurate picture of the size of the fund before official results are released, showed on Monday that the value of the fund slipped to 2.000 trillion crowns by the end of January.

The government put 313.6 billion crowns in new capital into the fund during the year, accounting for most of the growth, while positive returns on investment contributed 75 billion crowns and a stronger crown reduced the total by 154 billion.

"There was a positive return in 2007 on all of the portfolios managed by Norges Bank," the bank said.

NBIM was created in 1998 to manage the fund, which was established in 1990 but got its first capital in 1996.

In 2007, the government permitted the fund to increase its allocation into stocks to 60 per cent from 40 per cent.

Though roughly 80 per cent of new investment in 2007 went into stocks and 20 per cent into bonds, the fund has said it will shift towards equities gradually, and at end-2007 it still had 52.5 per cent of its total portfolio in fixed-income securities. (Reuters)

 

 

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