Norway’s sovereign wealth fund suggests increasing its equity allocation
Norway has the largest sovereign wealth fund in the world—now over $800 billion thanks to their good sense of setting up back in 1996.
Today they released a report on recommendations for how to handle the equity part of the portfolio.
I don’t think any of us are likely to ever be in charge of $800 billion. Nevertheless it is interesting to see what their thinking is.
In 2007 they increased their equity allocation from 40% to 60%. Today the majority of the commission recommended increasing it again to 70%. They aren’t going to increase to 70% over night — it will be a slow, gradual increase just as the increase from 40% to 60% was.
The main argument seems to be
A higher share of equities increases the expected return, and the contribution to the fiscal budget
While not exactly a reassuring statement, it is a similar situation that every investor finds themselves in today. The committee did not have consensus on the change and the two sides seem to be the same arguments that come up everywhere in this type of conversation: how do you really measure ability to take risk?
On the “increase to 70% side” they seem to be saying they’ve increased their ability to take on the risk:
- They have an extra decade’s experience of managing the fund.
- They’ve diversified away from petroleum.
- They have the ability to adapt to the increased risk (presumably by varying the fiscal contribution).
On the “decrease to 50% side” they see the same set of facts but argue that the ability to take risk has decreased:
- The fund has become increasingly important as a source of stabilisers and discretionary policies during recessions.
- If expected returns are lower, you just need to accept that instead of trying to chase higher returns.
