Norway’s sovereign wealth fund, the world’s largest with assets valued at 17.72 trillion Norwegian Kroner ($1.63 trillion) as of March 31, is on track for a strong first half of the year. The fund achieved impressive returns of 6.3% in the first quarter, resulting in a substantial paper wealth gain of 1.21 trillion kroner ($110bn). This robust performance was largely driven by its outsized bets in equities.
The Government Pension Fund Global (GPFG) put around 72.1% of its capital to work exclusively in equities in the first quarter, it said in a recent update. This move has paid off handsomely amid a raging bull market that has seen all major global stock indices such as the S&P 500, Nasdaq, and Dow and London’s FTSE 100, break new record highs.
“Our equity investments had a very strong return in the first quarter, particularly driven by the tech sector,” remarked Tronde Grande, deputy CEO of Norges Bank Investment Bank (NBIM), which manages the fund.
Accelerating Growth
GPFG’s equity investments returned 9.1% in the first quarter, outpacing its overall performance and benchmark index of 6.4% by nearly 50%. The benchmark index for Norway’s sovereign wealth fund is set by the Norwegian Ministry of Finance and derived from FTSE Group and Bloomberg indices.
Despite narrowly missing its benchmark, GPFG’s Q1 performance of 6.3% remains remarkable when compared with the fund’s recent track record. In 2023, the sovereign wealth fund delivered an impressive 16.1% full year return, equivalent to 2.22 trillion Norwegian kroner ($218 billion), rebounding from a 14% loss (1.64 trillion kroner or $150 billion) in 2022. Notably, its Q1 2024 gain of 1.21 trillion kroner ($110 billion) represents half of its entire 2023 gains achieved in just three months, highlighting the acceleration in the fund’s overall growth.
The outlook remains positive as the Norwegian government injected a substantial 96 billion kroner ($8.7 billion) into the fund during Q1. This infusion of financial resources positions the fund to pursue larger investments in the upcoming quarters, with the aim of achieving a strong annual return by year-end.
This strong government support comes even as China Investment Corporation (CIC), the sovereign power of Asia’s largest and world’s second largest economy, has grown in leaps and bounds to rival GPFG. CIC had assets under management of $1.35 trillion as of August 2023, according to Statista.
World’s sovereign wealth funds rankings, August 2023, Source: Statista
A Conservative Investment Approach
Norway has made it clear to investors that, for the time being, it will retain its conservative investment approach, delaying approvals for GPFG to invest in alternative investments like private equity.
Last year, the current Norwegian government asked the central bank to reconsider allowing GPFG to dabble in unquoted securities. However, an official approval has not been forthcoming, with policymakers asking for more time to examine the issue. The country’s Ministry of finance announced this April that a permanent expert council, to be established this year, will deliberate on whether to allow GPFG to venture into private equity. However, the specific appointees for this council have not been determined yet.
“The government does not wish to open for unlisted equities now,” Finance Minister Trygve Slagsvold Vedum said in the statement. “This is an important decision, and we must allow time to consider it carefully.”
This decision means further waiting for the wealth fund before it can invest in privately held firms. GPFG has repeatedly urged the ministry, most recently in 2018, to consider adding unlisted companies to its existing portfolio, which includes stocks, bonds, real estate, and renewable energy infrastructure. Previous governments have blocked the move, citing concerns around management costs and transparency.
Private Equity’s Growing Popularity
If GPFG eventually ends up venturing private equity, it will hardly be a pioneer. In search of alpha, sovereign wealth funds around the world have significantly scaled up their investment in private equity in the past few decades amid historically low returns in fixed income due to quantitative easing. According to one study, the proportion of SWF investments targeting private markets has risen from 10% in 2008 to 22% in 2020.
The risk with alternative assets, including private equity and real estate, is that they tend to be less liquid than publicly traded securities. The underlying companies can also be less than transparent with material facts that would have otherwise been disclosed to investors in a timely manner if they were listed on a public exchange. That said, SWFs, with their substantial resources to conduct extensive due diligence, low liabilities, and patient outlook, are well-suited to invest in illiquid assets. They can capture the long-term value in these assets without the risk of forced selling during market downturns.
Private companies in search of capital to grow and develop have also been actively courting SWFs. Unlike pension funds, which must regularly liquidate positions to meet short-term liabilities, SWFs can afford to hold illiquid assets for extended periods.
One giveaway that GPFG may be moving forward with its plans to get into private equity would be whether it starts hiring for PE- focused roles. “Investing in assets that are illiquid in nature, like real estate, private equity and infrastructure requires a very different skill set than investing in listed equities or bonds,” notes consultancy PwC in a 2020 report on sovereign wealth funds. “It also requires that the organisation is fit-for purpose in terms of investment governance and philosophy,” it adds.
A Powerful Force In Sustainability
As the Norwegian government contemplates allowing the GPFG to venture into private equity, the fund’s commitment to environmental and social causes remains steadfast. Established in 1990, GPFG’s initial purpose was to invest surplus revenues from Norway’s oil and gas reserves. However, in response to the climate crisis, GPFG’s mission has transformed. It now prioritises sustainable investments, aiming to secure Norway’s financial future beyond oil income.
GPFG channels government revenues away from fossil fuel industries and into more sustainable sectors. The goal? Prepare for a time when Norway’s reliance on oil revenue diminishes. The fund also invests with social impact in mind. According to the World Economic Forum, the Norwegian government allocates up to three percent of GPFG’s volume annually for social purposes. As of 2021, this “social kitty” held approximately $33bn.
Holding some 1.5% of all listed stocks globally, GPFG also exerts considerable influence on the corporate practices of many of the world’s largest and most successful companies. GPFG leverages its substantial financial clout and voting power in the boardroom to influence change around net zero emissions, equitable pay, gender equality, and board diversity.
Author: Acutel
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