Norges Bank Investment Management (NBIM) reported a 4.0% quarterly return for its GPFG fund in Q121, a performance that was 24 basis points above its benchmark return. Public equities led growth with a return of 6.6%, while unlisted real estate returned 1.4% and fixed income saw a negative return of -3.2%. Despite the robust return, NBIM faces the challenge of building the capacity to rebalance a portfolio that is weighted heavily towards equities.

The appreciation of the krone undermined performance of the fund, whose holdings are entirely outside Norway. Currency movements led to a NOK178 billion decline in the fund’s value, while NOK83 billion was withdrawn. Nevertheless, the market value of the GFPG increased by NOK120 billion over the quarter to NOK11.03 trillion (US$1.29 trillion)

Strong public equities performance has pushed allocations to public equity well above the strategic benchmark index allocation of 70%. By end-Q121, the asset class represent 73.1% of AUM. Under the fund’s rebalancing rule, it must reallocate from equities when they rise 2% above the strategic allocation. This implies shifting nearly US$13 billion into other asset classes.

The Norwegian SWF is seeking to diversify into renewables, targeted at 1% of the fund’s assets by end-2022, which could be achieved through liquidating some of its public equities. NBIM has already begun the mammoth investment task with its acquisition earlier this month of a 50% stake in the 752MW Borssele 1 and 2 wind farm off the Netherlands for US$1.63 billion.

However, Global SWF has pointed out that reallocating even small percentages of a fund as huge as GPFG carries significant challenges. NBIM has also restricted its renewables investments to developed markets, similar to its risk averse approach to real estate.

Global SWF Managing Director Diego López told Asian Investor today that scale can bring diversification difficulties; NBIM has failed to meet its initial target of 7% in unlisted properties with a policy of investing in prime locations. He said, “That meant that they had to deploy tens of billions of dollars in cities with limited investment opportunities. They failed to do so and had to revise their target to 5% (the actual number is still 2.5%).”

In a joint article for OMFIF, Diego López and Håvard Halland, Senior Economist at the OECD Development Centre, noted that diversification “would require extensive capacity building, since NBIM’s internal teams focus almost exclusively on public markets.”

They suggested NBIM could buy or partner with a firm that manages project development for renewable energy infrastructure, as Mubadala has done with Masdar Clean Energy.