Norway's pension fund to increase global risk

Norway's $300bn (£151bn, €222bn) Government Pension Fund, which invests the country's enormous oil wealth on behalf of its 4.6m people, is to make a big increase in its exposure to global equities from 40 per cent to 60 per cent.

In a significant reassessment of the fund's attitude towards risk, it also announced that it will bolster investments in smaller listed companies, may invest in real estate and will also consider investments in private equity and hedge funds in coming years.

The move paves the way for a sizeable increase in Norway's investments in overseas companies. Under the new guidelines, about NKr1,070bn ($178.9bn) of the NKr1,800bn fund will be invested in equities worldwide compared with about NKr720bn under the old guidelines.

The equity portion of the fund is 50 per cent invested in Europe, 35 per cent in the Americas and Africa and 15 per cent in Asia and Oceania. No changes to this geographical distribution were made in yesterday's announcement.

The remaining 40 per cent is invested in fixed-income instruments, although Martin Skancke, director-general of the fund at the ministry of finance, told the Financial Times that this would probably drop in future as the fund's real estate investments would come out of the portion presently allocated to bonds.

The decision to increase the equity portion of the fund is expected to reignite debate inside Norway about the risks the government is taking with the nation's profits from its huge energy reserves.

There has been a running debate about whether enough of the fund is used to improve the standard of life in Norway, with repeated complaints about issues such as the level of healthcare available for such a rich country.

Some have also expressed concerns that the fund is being too riskily managed by investing such a large portion in equities and that the fund could suffer in the event of a global market downturn.

Kristin Halvorsen, finance minister, dismissed these concerns. "We believe this represents an appropriate trade-off between expected risk and return. Since the first equity investments were made in 1998, we have gained experience and shown that we can handle volatility in returns without it undermining the fund's investment strategy or fiscal policy."

The ministry of finance, which oversees the management of the fund, also points to its performance as proof that it is generating decent returns and not taking on too much risk.

It said yesterday the Government Pension Fund - Global, which makes up almost all of the fund and which is invested entirely outside Norway, generated a 7.9 per cent return in local currency terms in 2006 and was worth NKr1,784bn at the end of the year. Since 1997, the average annual nominal return has been 6.5 per cent.

The much smaller remaining portion of the fund, the Pension Fund - Norway, which invests in the country, reported an 11.7 per cent return. Together, the entire fund was worth NKr1,891bn at the end of last year. It is forecast to grow to NKr3,043bn by 2010.

The change in the fund's equity-related asset allocation would take place over several years in order to minimise transaction costs, the finance ministry said. It will also continue to implement ethical guidelines to ensure the country's foreign policy and the fund's management operate in tandem.