Norway’s SWF does its job

by Chris Becker

First world problems in a nutshell. You have to drawdown some of your savings for the very first time – a meager $11USD billion or so from your near $1 trillion sovereign wealth fund (SWF)  – because lower commodity prices are taking big slugs out of your budget.

And then, and then – because you were soundly forecasting a 2.1% annual rate of return (ROR) for the next ten years on that fund, but realise that the low oil prices might be a secular shift, you consider shifting the ROR up to 2.5% by buying some more stocks…

Silly Norwegians, don’t they know thats obscenely risky? Why not do it the old fashioned way and let the household sector borrow to the moon, have your central bank go on a QE bond-buying spree and tighten that fiscal budget by not spending on infrastructure or providing incentives to shift to a carbon neutral economy?

By the way, here’s what happens when you convert your vast, but eventually non-renewable mineral wealth into savings instead of the ‘Strayan method of pissing it up against a wall, via Bloomberg:

“Norway’s $970 billion wealth fund has been ordered to raise its stock holdings to 70 percent from 60 percent in an effort to boost returns and safeguard the country’s oil riches for future generations. Any short-term view on growing risks will play little part, according to Trond Grande, the fund’s deputy chief executive.

‘We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,’ he said in an interview after presenting second-quarter returns in Oslo on Tuesday. The decision to add stocks ‘was made at a strategic level, on a long-term expected excess return that we’re willing to take risk to achieve. And parliament has said that they wish to spend some time to phase in that increase.’”

The composition of the Norwegian SWF fund is approximately 65% stocks, 32% bonds and 2.5% in property. Australia’s own SWF, the Future Fund (which is for funding public service pensions) has approx. $130 billion spread across the following allocation:

Quite a different composition at about 55% stocks/alternatives, and quite a lot of cash. And the Future Fund is doing a lot better in terms of nominal performance, returning 7.7% per annum since inception.

Imagine the returns if it had proceeds from the “once in a century” mining boom instead of the losing sale of Telstra?

That’s second world problems.

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  1. I went to the tip several times while moving house recently, and was astounded by the shitloads of giant flat screen TVs that were piled up in the electronics recycling section. Maybe the 40″ screens weren’t big enough, and had to be replaced by the 52″ screens, or whatever the latest idiocy is.

    Anyway, we’re lucky as a nation to have piles of both new and discarded flat screen TVs, compared to those poor bloody Norwegians, who only have a mountain of money to look after themselves. Oh, and we have lots or enormously expensive houses too.

    Lucky, clever us.

    • +1000 for this insight. Future generations will recoil at the resources this society lobs into landfill.

    • If you watch a lot of telly (which the average Australian does) you could replace an old 42″ plasma with a 55″ LED and repay the capital in power cost savings in 3 years. (early plasmas were absolute pigs with power)

  2. Smart to save their dough but now pushing 70% into equities when US stocks have only been this rich twice in 100 years with horrible demographics, and property bubbles are bursting in Oz (with massive borrowings from offshore) and Canada, and China slamming the breaks on the rest of the world via foreign investment and likely but necessarily to catastrophically slam on their own breaks very soon.

    • proofreadersMEMBER

      “… property bubbles are bursting in Oz …”

      The Chinese, whose country Straya now is, will ensure prices to the moon, just as they have back in the mother land.

      • The Chinese have become sellers. If even Triguboff can’t see prices going up in the short term, you know it’s game on! Corelogic daily in Sydney is down every day now that it is accounting for property in early July. That statistical anomaly due to the fhb is being reversed.

      • SupernovaMEMBER

        Yes exactly, very interested to see CL weekly results on Friday. Please note that 6 weeks is normal settlement, however noticed recently that many baby boomers paying cash are wanting 3 months settlement and some even 6 months.

    • HadronCollision

      If I had to bet on the Norse SWF investment strategy and yours I know where I’d put that bet

      • 10 points away again from closing half my position at my average then down 60! I’m going to enjoy the next 4,200 points! I said to two sets of friends the other day, that can they believe 42% of mortgages in Oz are interest only! Their response was yeah, we have interest only. And young kids. And businesses that are entirely reliant on a strong economy.

    • +1
      While the SWF is a great idea (and the right idea), it’s not a home run by any stretch, particularly if such a large slug is invested in risky assets. And while they have a fair chunk in bonds, a lot of that is credit, which is pretty risky too particularly as credit spreads are as tight now as they were just prior to the GFC. In fact, even sovereign bonds are in a massive bubble so Norway’s SWF really doesn’t have much in the way of protection at all.

      That enforced $11bn economic draw-down is going to pale in comparison to the losses when the next bear market strikes. And the next bear could well make the GFC episode look like a kiddies’ teaparty.

      • Dominic
        Further basically if you run a CAD you can’t have an SWF. You are only selling your own assets to buy overseas assets. Even if we ever get to run a surplus we would be better trying to buy a bit of our own country back!!! I’d prefer that came from perople’s savings but whatever! Anything would be better than nothing.

    • Norway made bank on the commodities boom, they saved it for the downturn.

      We handed out baby bonuses.

  3. Plus oil is hugely correlated to stock prices. Like every person and country I know, got all their eggs in one basket. Minsky.

    • That WAS the grrwat question nobody, especially the media or ABC, refused to ask. What’s more it was to catch up with liabilities already incurred!!!! Nothing future about it.

  4. Norway’s Immigration policy will deplete their SWF.

    Norway spent NoK 56 Billion for training of immigrants, yet they are still mostly unemployed, sounds familiar…Refer to link;

  5. Oz runs CADs, has done for what, … about 50/60 years, … bar a couple maybe? How does a SWF fit into that system? We’re already selling everything & everyone. What would a SWF achieve in the current OZ economic environment, other than effectively be fiscal contraction?

  6. – Invest MORE in stocks ? In a country that has seen a real estate/property boom as well (like in Australia) ?

  7. – Norway can bet its bottom dollar (or norwegian kronar) that investing in stocks (& bonds) is – sooner or later – bound to blow up in their (financial) face.