Norwegian Sovereign Wealth Fund Rids Itself of US Mortgage Bonds

Norges Bank Investment Management (NBIM) has heavily reduced its holdings of mortgage-backed securities.

(November 1, 2011) — Norway’s $570 billion sovereign wealth fund has rid itself of all its holdings in US mortgage-backed securities.

As part of its shift in its fixed-income portfolio, the fund now holds no mortgage bonds issued by Fannie Mae and Freddie Mac and an “insignificant” amount of private home loan-backed bonds, Yngve Slyngstad, chief executive officer of NBIM, told Bloomberg News. “We’ve reduced our holdings of mortgage-backed securities,” he said. “MBS has been taken out of our internal policy benchmark. This means that we don’t have mortgage-backed securities issued by Freddie Mac and Fannie Mae any longer.”

The sovereign wealth fund’s bond holdings returned 3.7% in the third quarter, fueled by gains in German and US government bonds. Meanwhile, the fund’s securitized debt gained 0.3% as measured in international currencies, Bloomberg reported.

The Norwegian sovereign wealth fund’s decision to sell the entirety of its US mortgage bonds follows a J.P. Morgan analysis that revealed that sovereign wealth funds are reconsidering their investment strategies following low performance in equities against low-yielding fixed-income. “Ten-year returns on government bonds have been generally superior to those of public equities. However, these returns have been driven by large falls in bond yields,” Patrick Thomson, Global Head of Sovereign Wealth at J.P. Morgan Asset Management, said in a statement. “This fall in prospective government bond returns, combined with continued sovereign credit crisis and the ongoing volatility in equity markets, has encouraged many sovereigns to take a fresh look at the way they invest.”

Thomson continued: “Analysis of recent market events has also highlighted the fact that returns cannot be adequately modeled using normal distributions; therefore, investors need to consider the impact that ‘non-normal’ returns have on asset allocation.”

According to J.P. Morgan’s analysis, more than 50% of sovereign wealth fund assets are typically invested in publicly listed equity. A total of 31% are in bonds and cash, with the remaining amount in alternatives, including hedge funds, commodities, property or infrastructure.

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