The ripple effects of Russia’s invasion of Ukraine caused the biggest loss since the 2008 financial crisis for Norway’s US$1.3 trillion sovereign wealth fund – and put boosters on its case for portfolio diversification into private markets.

The Government Pension Fund Global, managed by Norges Bank (NBIM), lost 14.1%, equivalent to US$164 billion. The losses caused by the impact of higher inflation, higher credit costs and the fallout from the war in Ukraine were mitigated by record inflows totalling NOK1.09 trillion (US$109 billion), compared to outflows to the government of NOK119 billion in 2021.

The hit to US equities was the biggest setback for the fund, with a total loss of NOK466 billion – far worse than the NOK70 billion loss in German equities.

In terms of sector exposures, the strongest sectors in 2021 were the weakest in 2022. The worst performers were tech (down NOK495 billion) and consumer discretionary (down NOK261 billion), while the best performers were energy (up NOK116 billion) and financials (up NOK49 billion). While Amazon, Meta and Tesla bled value, they were partly offset by gains by ExxonMobil, Chevron and Novo Nordisk. Indeed, a focus on energy stocks and away from IPOs helped it avoid the 20% loss seen in global stocks last year.

Fixed income investments had a -12.1% In real estate, there was a 0.1% return on unlisted property but a 31% decline in listed real estate, leading to an overall return of -14% - out-performing the benchmark by 0.9%.

While the results were not a surprise given the performance of wider markets, they could add impetus to calls for greater investment in private equity – an asset class the notoriously cautious and conservative Norwegian goliath has shied away from.

Seeking Permission for Bigger Returns from Private Markets

NBIM lacks the significant alternatives allocation, which have supported the robust multi-year returns of peers. Moreover, the high proportion of public equities means that the fund is prone to volatility. 

The Oslo-based fund has renewed its request for permission to make unlisted investments, beyond real estate and renewables infrastructure. In 2018, the finance ministry rejected the idea, when the fund suggested private equity would boost returns. Earlier this month, NBIM renewed the request, stating in a letter to the ministry, “we're seeing more and more indications that a larger share of value creation is taking place in the unlisted market.” It pointed out that the number of listed companies worldwide has leveled off with the number in developed markets in decline.

The letter added, “These trends may mean that the fund misses out on an increasing share of companies' value creation by waiting until they are listed and eventually enter the fund's benchmark index.

"It should be investigated whether the fund's investment strategy should reflect these trends, and whether unlisted equities in general should be included in the fund's investment universe."

Global SWF’s research finds that while NBIM has made above average returns in fixed income and public equities over a 10-year period, there are bigger gains to be made in private equity which returned an average of 15.7% - well above the 12.9% average return NBIM made on public equities.

Tangen Remains Gloomy

NBIM CEO Nicolai Tangen, who headed a hedge fund before his appointment, said an advantage of private equity is that it could see valuations drop with write-downs expected, leading to opportunities for stronger long-term growth.

At the recent Davos summit, he stated that rising interest rates may still have some way to go due to the potential inflationary impact of China’s emergence from pandemic restrictions. He remarked, “The problem with that kind of scenario is you’re not going to make money anywhere. When that happens, you will probably lose money in the bond market, in the equity market, you lose money in the real-estate market. I don’t think there’s any place to hide.”

Related funds NBIM