NORWAY - The Norwegian Government Pension Fund - Global will continue with its plans to "expand its portfolio" and increase its equity allocation as it has a "higher risk-bearing capacity" than other pension funds, the governor of Norges Bank has claimed.

In a speech to a conference on the Norwegian Public Service Pension Fund, Svein Gjedrem admitted uncertainty in the financial system and global growth prospects combined with a fall in equity prices had "drawn focus on variations in the fund's value".

The comments followed the publication of the monthly balance sheet for Norges Bank, which revealed the value of the sovereign wealth fund (SWF) fell to NOK1.947trn (€246bn) in March, down from NOK1.970trn in February and NOK2.017trn in December.

However, he pointed out the fund's "distinctive features" - such as not being "earmarked for particular obligations" like traditional pension funds, and having a long-term investment horizon which means they do not have to pull out of markets at an "unfavourable time" - means the SWF can continue its existing investment strategy, including allocating more money to equities.  

Gjedrem said: "The fund has a higher risk-bearing capacity than other comparable funds. It can thus to a larger extent invest in financial instruments that may vary more in value, but provide a higher expected return, which in practice means investing in equities. The allocation to equities will now increase from 40 to 60%."

The governor also highlighted the benefits of spreading investments to improve the risk-return trade off and claimed "this is why the fund is expanding its portfolio, not only in terms of its geographic exposure, but also the depth of its investments in individual markets".

Norges Bank Investment Management (NBIM), which manages the SWF, confirmed earlier this month the fund would be switching 5% of its assets into real estate and moving more money into emerging markets. (See earlier IPE.com story: Norway pension fund allocates 5% to real estate)

Gjedrem pointed out the SWF, which has been in place for 12 years, has "grown and developed faster than envisaged", meaning it "cannot adapt its asset positions to the momentary picture" so it is "important that the strategy remains firmly in place through turbulent periods".

In his speech, he pointed out part of the fund's strategy is to rebalance the portfolio by "shifting into assets that show the strongest fall in value", in particular the assets where "the crisis is most severe, but which historically have featured the highest long-term return potential".

As a result, he suggested the fact the pension fund recorded its first annual result below the benchmark, and the first negative return from active management in 2007 would not affect the investment strategy. (See earlier IPE.com story: Norway misses pensions benchmark with 4.3% return)

"Losses from active management must be expected in periods. The performance of the fund's investment management must be evaluated over a long time horizon. It does not change our confidence in and conviction that our organisation will contribute to achieving excess returns in the longer run," added Gjedrem.

That said, in his speech the governor admitted "continued turmoil and weaker global growth will affect the Norwegian economy" and could possibly reverse some of the "positive driving forces" in the economy.

In particular, he suggested weaker growth may impact on the export industry and "spill over" into other business sectors and increase uncertainty among households, leading to "somewhat slower growth further into 2008".

"So far, the direct consequences of the turbulence have been limited in Norway. However, continued turmoil and weaker global growth will affect the Norwegian economy. Household saving is negative and over time households must be expected to seek to redress their financial imbalances", added Gjedrem. .

As a result, Gjedrem confirmed the strategy of the central bank's executive board is to keep the key policy interest rate - currently 5.25% - between 5-6% until June 25 2008, "unless the Norwegian economy is exposed to major shocks".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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