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Norway oil fund plots Europe to US equity shift

World’s largest sovereign fund set to move away from traditional Europe bias



Norway’s €901.7m sovereign wealth fund is set to shift its asset allocation towards North America and away from Europe.

The move will see the fund move closer to tracking a global float-adjusted market-weighted index.

The move has been recommended by Norges Bank, the Norwegian central bank which runs the fund, in one of two letters it has sent to the Norwegian finance ministry on August 27th. The ministry had officially asked the fund about its approach to equity benchmarking and geographical weightings in November last year.

In a separate move, the bank has suggested allowing the fund to hold up to 1 per cent of its equity portfolio in unlisted companies, currently equivalent to about $7bn.

To date, the fund has embraced a broad international exposure using FTSE Russell indexing expertise, but this been weighted towards countries with which Norway does most trade with across Europe. This is partly due to historical concerns about currency risk.

That approach is set to change although the fund will not give details of exactly how as yet.

The fund writes: “We are of the opinion that the geographical distribution should be adjusted further towards float-adjusted market weights by increasing the weight of equities in North America and reducing the weight of equities in European developed markets.

“The gap to market weights will then be smaller than today. We assume that the Bank will be given an opportunity to return on the issue of how this adjustment to a new geographical distribution should be implemented.”

The letters also explain the current approach including how its bias toward Europe has had implications for the weightings of the sectors it invests in.

  • The benchmark index for equities is based on, but differs somewhat from, a global float-adjusted market-weighted index from the index provider FTSE Russell.
  • The biggest differences are due to the decision to assign equities adjustment factors according to their country of origin.
  • Equities in European developed markets have been assigned a factor of 2.5, North American equities a factor of 1, and equities in other developed markets and in emerging markets a factor of 1.5.
  • As a result, the fund has a much larger ownership share in companies in European developed markets than in North America.
  • Since the sector distribution varies between countries and regions, these adjustment factors impact on the index’s sector composition.
  • For example, the fund is invested more in financials and health care, and less in consumer services, technology and utilities, than a float-adjusted market-weighted index.

Details of the current holdings

As part of the process, Norges Bank executive Board member Kjetil Storesletten said: “The starting point for the Executive Board’s advice is the fund in isolation. I agree with the Board’s assessment that this perspective indicates that the portfolio weights should be adjusted towards market weights. The Bank’s analyses show that, if the fund is considered in isolation, indices based on FTSE full market weights and FTSE float-adjusted market weights would have given a better trade-off between return and risk than the regional adjustment weights the fund uses today.

“The conclusion changes, however, when viewed from a broader perspective of wealth. The very reason why Norway set up the oil fund was a broad view of national wealth, and it was this perspective that was behind the Mork Committee’s advice [previous expert advice] on the equity share. This perspective indicates that higher weights should be assigned to countries and markets with a lower correlation with Norwegian government revenue and Norwegian economic output, and lower weights to countries and markets that move more closely in line with Norwegian income.”

In a second letter, the fund outlines the return and volatility profile of various regions, which may also help explain the change.

“Over the past 25 years, North American equities have produced an annualised return of 9.9 percent, against 8.3 percent for European developed markets, 5.0 percent for other developed markets and 6.7 percent for emerging markets. Over the same period, volatility as measured by annualised standard deviation has been 14.8 percent in North America, 17.3 percent in European developed markets, 17.1 percent in other developed markets and 23.3 percent in emerging equity markets,” it writes.