Norway's US$1 trillion wealth fund ends bet on higher rates

[OSLO] Norway's US$1 trillion wealth fund ended a long-running bet on higher interest rates as its massive bond portfolio was swamped by negative yields.

After presenting results in Oslo on Wednesday, Norges Bank Investment Management's deputy chief executive officer Trond Grande said the fund is now no longer short duration compared to its benchmark, meaning that it will profit relatively more from falling rates. The fund raised it duration to 7 years from about 5 years, he said.

The shift wasn't a "top down" decision, but a result of moves by the fund's portfolio managers, Mr Grande said.

"The purpose of the bond portfolio is first and foremost to be liquid - have some liquidity - and help mitigate the total fluctuation risk in the fund," Mr Grande said in an interview. "Then it goes without saying that you also want to get a certain return from it, but it's difficult to imagine that with the low rates and yields it will be able to contribute something meaningful."

Growing concern over the global economy and trade disputes have driven bond yields below zero across large swaths of the developed world. Central banks, led by the US Federal Reserve, are again cutting rates and adding stimulus.

The fund reported on Wednesday that it delivered a return of 3 per cent, or 256 billion kroner (S$39.6 billion), in the second quarter, led by a 3.1 per cent return on bonds. Its stocks rose 3 per cent and its real estate holdings 0.8 per cent.

The Oslo-based fund, which holds 1.4 per cent 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 selloff at the end of last year, then hitting a new long-term target of holding 70 per cent in equities.

The fund said it now has a record more than 600 billion kroner 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 per cent from 4 per cent.

The fund also this year received approval from the 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 per cent of the bond portfolio from 8.1 per cent at the end of the first quarter, with the biggest decline seen in Mexican debt.

The largest stock holdings at the end of the quarter were Microsoft, Apple and Amazon.com. Its largest bond holdings were in US Treasuries, followed by Japanese and German government debt.

In the second quarter, the government deposited 6 billion kroner into the fund, down from 8 billion kroner in the first quarter. The fund's return in the quarter missed its benchmark by 0.2 percentage point.

BLOOMBERG