Norway's SWF faces lower returns as bond yields decline

Oslo

NORWAY'S sovereign wealth fund (SWF), the world's largest, faces diminishing returns due to low bond yields and should reduce its fixed-income portfolio in favour of real assets, its central bank governor said on Thursday.

The US$860 billion fund, built up from oil and gas income, is now worth twice as much as Norway's non-oil GDP. But measured in relation to the economy, its size has probably peaked, years earlier than expected, as oil income falls and budget spending increases.

"We must be prepared for the possibility that (returns) will be lower, perhaps below 3 per cent," governor Oeystein Olsen said. "To have 35 per cent share of bonds in this very low-rate environment, which will remain for quite a few years, is challenging, so the bond share should be reduced."

The fund has earned a real return of 3.8 per cent since it was set up in 1996, below the government's target of 4 per cent. Mr Olsen also warned that even its equity holdings, which usually yield more, are facing muted prospects as moderate growth in developed economies will probably feed into corporate earnings.

With stakes in more than 9,000 companies, the fund owns 1.3 per cent of all global shares, holding 61 per cent of its assets in stocks at the end of the third quarter. It acts as a sort of national endowment, with the Norwegian government looking to spend only its returns while maintaining the principal indefinitely.

Mr Olsen said the fund should increase its holdings of real assets, but that the expansion of its asset portfolio depended on government approval. Reuters