Norway’s $1 Trillion Wealth Fund Suffers First Loss In 2 Years, Bets On Rising TSY Yields

Norway’s $1 trillion sovereign wealth fund, the world’s biggest, had two notable announcements today: the mega-fund reported its first quarterly loss in two years as it suffered from a global selloff in equities in the three first months of the year… which it had no means of avoiding as more than two-thirds of its holdings are in stocks; it also shifted its bond portfolio to bet on further US Treasury yield increases.

Commenting on the results, the chief executive of the fund, Yngve Slyngstad said, “The most important expression of risk in the fund is that the strategic equity share is set to 70 percent. This means that fluctuations in the fund’s value are predominantly determined by the development in global stock markets.”

The Norway Government Pension Fund Global booked negative returns of 1.5 percent for the first quarter of the year, or a loss of US$15.1 billion (171 billion kroner). In stocks, the return was -2.2 percent, but in unlisted real estate investments there was a positive return of 2.5 percent. The real estate holdings of the fund, however, are just 2.7 percent, so that positive result had no bearing whatsoever on the overall performance of the fund. The rest of its holdings, at 31.2 percent, are in bonds.

Meanwhile, on the bond side, the world’s biggest wealth fund is sticking to an overweight position in the shorter bond maturities. The fund’s fixed-income investments fell 0.37 percent in the quarter, outperforming a 0.44 loss in its benchmark index’s fixed-income portion. The fund held $75 billion in U.S. Treasuries at the end of the first quarter, $22 billion in Japanese government bonds and $14 billion in Germany’s debt.

The greater exposure to short duration means it will be less sensitive to a general increase in yields than the benchmark index it follows. It also means that it will profit less if yields drop as many sellside desks believe will happen if the 10Y remains unable to solidly breach the 3%.

The rise in U.S. yields is an isolated phenomenon, said Yngve Slyngstad, the chief executive officer of Norges Bank Investment Management: “There’s been a lot of focus on U.S. interest rates, but in the other main markets, it’s been pretty stable, you haven’t had the big rate changes,” he said in an interview in Oslo following the presentation of the fund’s first-quarter report on Friday. “Monetary policy is in a different cycle than Europe and Japan, especially.”

Like other investment vehicles, the Norway fund suffered the effects from growing unease about protectionist policies in the United States combined with rising wages and expectations for more interest rate hikes. U.S. stocks comprise 36.1 percent of the fund’s stock portfolio and represent its single largest market. The largest equity holdings are in the tech sector, including Microsoft, Apple, and Alphabet, as well as Nestle.

Last month, the fund warned it could lose US$420 billion from its value— 40% — this year if the market crashes and the Norwegian krone strengthens. “[Our estimate] is much larger than the numbers that have been discussed in Norway on the spending rule [that a government cannot use more than 3 per cent of the fund], and what would be the game plan in case the fund were reduced in krone rapidly,” Slyngstad told the FT at the time.

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