The Norwegian sovereign wealth goliath Norges Bank (NBIM) has excelled in its performance over the first half of the year, with a 9.8% return helping to turn around a dismal performance in 2022 when it reported a 14.1% loss, equivalent to US$164 billion.
NBIM was hit last year by a 17% fall in public equities, but in H1 2023 strong equities performance coupled with a weaker kroner helped reverse the highly liquid fund’s fortunes. As a result, public equities made up 71.3% of the total portfolio by end-June, compared to 68.5% at the same point in 2022. Equities rose 13.7% and fixed income returned 2.2%, while alternatives – a small portion of the overall portfolio – saw negative returns with a 4.6% loss in unlisted real estate and a 6.5% loss in unlisted infrastructure.
While the Ukraine crisis may have created vast swings in NBIM’s performance since the Russian invasion in early 2022, the fund has received massive inflows due to high oil prices – US$141 billion over the past six quarters. In 2022, an inflow of oil revenue totalling NOK1.09 trillion coupled with a NOK642 million positive impact from a strong krone helped offset the NOK1.64 impact of the negative return to result in a net inflow of NOK90 billion. In H1 2023, inflows continued at a slower pace, totalling NOK392 billion, but with a NOK1.5 trillion positive impact from the strong return along with NOK980 billion boost from fluctuations from the krone, the fund’s market value surged NOK2.87 trillion to NOK15.3 trillion (US$1.5 trillion).
Tech stocks were among the main drivers of NBIM’s equity growth, returning 38.6% over H1 amid rising interest in AI. Consumer discretionary stocks returned 20.7%, making them to second biggest growth sector in the fund’s shareholdings, supported by the lifting of pandemic restrictions in China. On the downside, energy stocks returned just 0.4% due to a correction in oil and gas prices from the peak seen in mid-2022 due to excess supply, mild winter conditions and lower industrial demand as some economies reported zero growth and contraction.
From 1996 to 2022, the fund grew at an annual average of NOK566 billion (US$53 billion at the current exchange rate). This annual surplus is likely to continue up to 2030, putting it on course for total AUM approaching US$1.9 trillion by the end of the decade. This would put it neck and neck with Saudi Arabia’s Public Investment Fund (PIF), which is targeting US$2 trillion, and the China Investment Corporation (CIC), which has followed NBIM’s pace of growth despite a radically different asset allocation.
NBIM’s growth will continue to be influenced not only by returns from a very conservative asset allocation, but also oil prices and the strength of the krone. There are downside risks to all three factors. Funds with a higher level of allocations to alternatives tend to have higher returns over the long-term, so NBIM’s robust return in H1 will not be sustainable due to fluctuations in public markets. Oil revenue has been supported by geopolitical instability and supply disruptions, but in the long-term will be undermined by a move away from fossil fuels to renewable energy, as well as declining output from North Sea oilfields.
Offsetting the effect of falling oil revenue inflows is the effect is the value of the krone. The Norwegian currency is heavily influenced by crude oil prices and if these soften over coming years, it will decline in value, leading to higher inflows in krone terms in a fund that is exclusively allocated to external markets. However, oil revenue inflows have netted 76% more revenue over the fund’s lifetime than the overall positive impact of krone appreciation, which suggests krone strength will not sufficiently make up for declining oil revenues.
NBIM lacks sufficient alternatives allocation to follow the strong multi-year returns of peers. 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. Moreover, the high proportion of public equities means that the fund is prone to volatility.
Earlier this year, the Oslo-based fund 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."
