Last December we joked that the Norwegian sovereign wealth fund had responded to sinking returns and withdrawals required to fund budget deficits by allocating another $ 130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns." (see: Norway Buying $ 130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash). The extra equity purchases pushed the fund's total equity allocation to a staggering 70% of their $ 860 billion in assets under management.
After being forced to withdraw at least $ 15 billion to fund 2017 budget deficits, the $ 860 billion Norwegian sovereign wealth fund has announced that it will change it's portfolio allocations to try to make up the difference. The change will result in 75% of the fund's capital being allocated to global equities, up from the current 60%. Sure, because funneling another $ 130 billion to the global equity bubble is just the prudent thing to do for an extra 40bps of "expected average annual real returns."
The central bank’s board, which oversees the fund, on Thursday recommended an increase in the equity share to 70 percent from 60 percent. That will raise the expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent, respectively, under the current setup.
The world’s largest sovereign wealth fund said that it expects an annual return of only 0.25 percent on bonds over the next decade and that the expected “equity risk premium,” or return on stocks over government bonds, will be just 3 percentage points in a cautious estimate.
“In our analyses, this is clearly evident in global data: internationally, growth in firms’ cash flows and equity returns are correlated with growth in the global economy,” Deputy Governor Egil Matsen said in a speech Thursday in Oslo. “Global economic growth in the coming years is expected to be below its historical level. This ‘pessimism’ is partly related to the driving forces behind the low level of the real interest rate.”
Alas, with global equity bubbles becoming ever more bubblier with each passing day, the bet on equities has paid off 'bigly' for Norway and pushed their AUM to over $ 1 trillion for the first time ever. Per Bloomberg:
Norway’s sovereign wealth fund hit $ 1 trillion for the first time on Tuesday, driven higher by climbing stock markets and a weaker U.S. dollar.
The milestone valuation was reached for the first time on Sept. 19 at 2:01 a.m. in Oslo, Norges Bank Investment Management said in a statement on Tuesday.
“I don’t think anyone expected the fund to ever reach $ 1 trillion when the first transfer of oil revenue was made in May 1996,” Yngve Slyngstad, chief executive officer of the fund, said in the statement. “Reaching $ 1 trillion is a milestone, and the growth in the fund’s market value has been stunning.”
Meanwhile, the fund's record AUM comes despite taking withdrawals for the first time ever in 2016 and expectations that another 70 billion kroner will be withdrawn this year to help offset budget deficits.
Norway’s government last year made direct withdrawals from the fund for the first time in its history and is expected to take out about 70 billion kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 percent from 4 percent.
The fund has been given permission to raise its stock holdings to 70 percent from 60 percent, with an equivalent cut in bonds. That could help it eke out higher returns, or at least maintain the 8 percent annualized real return it’s had over the past five years.
But Slyngstad also recently said he sees fundamental issues with the global economic system and trade, which is being buffeted by increasing global political risk. And that’s not good for a fund that owns 1.3 percent of global stocks.
So, it appears that Norway's reckless equity bet has paid off for now…but, what is the saying about 'he who laughs last?'