NORWAY - Strong stock markets have seen Norway's Pension Fund Global (NPFG) return 7.1% in the first three months of the year, with holdings in financial institutions rebounding after a weak performance that saw the sector lose nearly a fifth of its value at the end of 2011.

Announcing its first-quarter returns, the country's oil fund said it had reduced holdings in most European sovereign debt, with all Portuguese and Irish sovereign bonds sold, while exposure to Spain, Italy, the UK and Germany was cut.

However, interest in AAA-rated Austria grew - with NPFG increasing its holding by nearly 25% - while exposure to US Treasury bills increased by NOK25bn (€3.2bn) to NOK275bn.

Norges Bank Investment Management (NBIM), which manages the scheme's NOK3.5trn in assets, credited equity growth of 11.1% for its strong performance, with the global financials sector recovering from returns of -19% in 2011 to become second-strongest equity sector, posting returns in excess of 16% in Q1.

Yngve Slyngstad, chief executive at NBIM, said stock markets in the US, Europe and Asia had "moved up in lockstep" over the three months, with Apple becoming the fund's forth-largest equity holding after it gained 48% over the period.

Norges also had to contend with the exchange of Greek debt, with its NOK1.3bn holding exchanged for new Greek bonds worth NOK400m, as well as three bonds backed by the European Financial Stability Facility worth a further NOK1.1bn.

Overall, the fund's exposure to Spain, Ireland, Portugal, Italy and Greece has fallen steadily since 2010, when combined sovereign debt holdings for the five countries amounted to NOK94bn.

Since then, it fell to just NOK42.7bn in March on after the sale of Irish and Portuguese notes, with Italian debt accounting for more than half of its exposure to the countries' five governments.

"Predictability is important for a long-term investor, and the euro area faces considerable structural and monetary challenges," Slyngstad said, with Norges increasing exposure to emerging market country debt, such as Brazil, Mexico, India and Indonesia, denominated in the respective local currency.

The shift away from Europe potentially comes as a result of the Norwegian parliament announcing a change in strategy for NPFG, with the Storting mandating a reduced 40% exposure to European assets, with increased focus on emerging markets.

Explaining the fixed income portfolio's lower return of 1.6% - compared with 8% for 2011 - Norges said government bonds produced a negative return of 0.6% between January and March, with T-bills as its largest single fixed income stake, returning -1.6%.

UK gilts fared worse, returning -3.5%, while euro-denominated sovereign debt fared better, returning nearly 3%.

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