NORWAY - The Government Pension Fund - Global has ruled out extending into high-yield and emerging market bonds, and has also warned it is unlikely to reach its 5% allocation to real estate for "several years".

A report from the Ministry of Finance on 'the management of the government pension fund in 2008', said despite deciding to move into real estate in 2008 new regulations are required to allow it to invest through unlisted instruments, and these are not expected to be finalised until sometime in 2009.

In addition, the report noted the global real estate market had poor returns and a significant drop in turnover in 2008, so the ministry confirmed it "is not intending to lay down a fixed investment plan for the coming years, as the phasing-in will have to be adapted to the market conditions and capacity".

It suggested the property investments in the first few years will "probably be concentrated in a number of chosen areas, and it will take time to build up a global real estate portfolio with a high degree of risk diversification. The ministry assumes it will be several years before the real-estate portfolio constitutes 5% of the fund".

The new rules for real estate will be included in a new regulation governing the management of the Government Pension Fund - Global, expected to come into force on 1 January 2010, so although they have yet to be finalised the report confirmed restrictions are going to be introduced so "unlisted real-estate companies and funds cannot be established in closed jurisdictions", or tax havens.

In a review of its investment strategy, the ministry highlighted the decision in 2007 to gradually increase its equity allocation from 40% to 60% now means the existing portfolio is at 50%, equating to an average ownership stake in the world's stock markets of 0.75%. 

However, while the report revealed the government is continuing to develop its investment strategy, including through the new environmental programme of investments, it has rejected a move into high yield and emerging market bonds.

The ministry said the Strategy Council had admitted that "in principle expanding the benchmark portfolio to also include high-yield bonds and bonds issued in emerging markets is consistent with the desire to ensure further risk diversification".

But it added high-yield bonds have some "undesirable risk properties in periods of economic downturn", and regarding emerging market bonds the Council argued "limited data render it difficult to assess the historical return and risk of these kinds of investments".

The ministry said it had taken note of the comments and "for the time being it is not recommended to expand the benchmark portfolio for interest-bearing instruments with high-yield bonds and bonds issued in emerging markets", but added these issues will be reassessed, and the Storting will be informed of the findings at a later date".

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