Norway's Finance Ministry Urges SWF to Lower Exposure to Europe

(April 10, 2011) — Norway’s Finance Ministry has said that its sovereign wealth fund — the Government Pension Fund Global (GPFG) — should gradually lower its exposure to European markets while upping its allocation to emerging markets.

In an annual report on the management of Norway’s sovereign wealth fund presented to the Norwegian Parliament, the government stated: “The global production capacity and financial markets are increasingly located in other parts of the world, also in emerging markets. Over time, the relative allocation to Europe should therefore be reduced, and allocations to the rest of the world similarly increased.” The report stressed the importance that the change in regional allocation should be implemented gradually. Currently, more than 50% of the fund’s capital is invested in European stocks, bonds, and real estate.

While the document did not explicitly indicate that the European debt crisis was the contributing factor for curtailing exposure to the region, it explained that the decision for the sovereign wealth fund to reduce its exposure to European markets is due to smaller than expected currency risk. “The review in the report implies that the GPFG’s currency risk is relatively limited, and smaller than previously assumed. Hence the current concentration on European investments seems less warranted,” the Finance Ministry stated in a release describing the annual report.

In an interview last month with Dag Dyrdal, Chief Strategic Relations Officer at Norges Bank Investment Management (NBIM), which manages Norway’s GPFG, Dyrdal reiterated the fund’s committed yet cautious position on its exposure to Europe and its more optimistic views on investments in emerging markets. He noted that the fund is heavily diversified in sovereign bonds across Europe, and will remain committed to the asset class despite Europe’s sovereign debt crisis. “The big question is whether the overweighting of Europe in equities and fixed-income is the right one,” he told aiCIO, adding that he sees opportunity in India and China, where growth has trumped that of Europe and the US.

“Most investors these days have some concerns about inflation,” Dyrdal told aiCIO. “With 60% in equities and 40% in fixed-income, we still think we’ll be able to achieve our expected return even if fixed-income underperforms,” he said. While the fund is currently solely invested in public equity, fixed-income, and, more recently, real estate, Dyrdal indicated that the realistic fear of higher inflation could push the government to further diversify the fund into real estate, infrastructure, and private equity for protection of the real return.