Daily Management Review

Norway's giant oil fund secures income for the sixth time in a row


The Norwegian Oil Fund took advantage of favorable market conditions and received revenue for the sixth consecutive quarter, the Financial Times reported.

The world's largest sovereign investment fund recorded a yield of 3.2% in the third quarter of 2017. The return on the fund's investments in shares was 4.3%, in bonds - 0.8%.

"We had positive results for all classes of assets this year, and the profitability of our investments in shares was particularly high," said Yngve Slyngstad, executive director of Norges Bank Investment Management, which manages the fund. At the same time, he warned that a more difficult period could come soon. "We must be prepared for the volatility of the stock markets and we cannot expect such income every quarter," added Slingstad.

Investments in shares of Royal Dutch Shell, Chinese Tencent and Apple brought the largest positive contribution to the fund's profitability in the last quarter. The fund suffered the biggest losses from Nestlé, Teva pharmaceutical company and General Electric. By the end of the third quarter, 65.9% of the fund's funds were invested in shares, compared with 65.1% at the end of the second quarter. The share of investments in fixed-income securities decreased from 32.4% to 31.6%. 2.5% of the fund is still invested in real estate.

The oil fund, whose volume previously reached $ 1 trillion, is currently at the center of a broad public debate about its future management model.

After its volume reached $ 1 trillion in September, the world's largest welfare fund can expect even more control in the future

At present, the government is considering the proposal of a committee, headed by the former head of the central bank, about the separation of the fund from Norges Bank. This idea is seen as a means of tightening supervision. At the same time, many argue that the fund has become too large and complex to be run by the central bank, which has enough economists, but lacks experience in controlling investments.

"With the help of a separate council, we will be able to appoint professionals who really understand asset management and who may have the necessary critical attitude to the fund’s management," said Knut Anton Mork, a professor at the Norwegian University of Natural and Technical Sciences.

This issue attracted additional attention last month, when the fund proposed a plan to abandon the current bond index. Leading economists and scholars in Norway believe that this move raises concerns. In particular, they are worried that the fund's leaders require too much freedom in how to control the wealth of future generations of Norwegians.

The fund proposed an index change plan for its bond portfolio worth $ 330 billion, reducing the number of currencies in it from 23 to three - the dollar, euro and pound sterling - and dropping corporate bonds. The fund said that it makes no sense to take on currency risk on the background of the convergence of the yields of world bonds and that it is only interested in the most liquid bonds. 

At the same time, the organization’s representatives said that they should be allowed to invest in the same bond pool as it is now. According to experts, this raises questions about the fund’s motives. Potentially, this may mean that it will be easier for the fund to surpass the index and impress its owners by making bets on bonds that are not part of the benchmark.

source: ft.com, bloomberg.com