Saturday, March 19, 2011

Norway's Sovereign Fund Moves to Cut Bond Position

Norway's government-run oil fund, the world's second-largest sovereign-wealth fund, is cutting its bond holdings and shifting its investments to real estate to protect itself against rising inflation.


The Government Pension Fund Global, valued at nearly 3.1 trillion Norwegian kroner ($548 billion) at the end of last year, historically has invested 60% of its assets in stocks and 40% in bonds. It now aims to gradually invest as much as 5% of its assets in real estate while reducing its fixed-income investments by the same percentage.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, the unit of Norway's central bank that manages the fund, said it will take time to build up the fund's real-estate portfolio, which initially will focus on Europe. "It's quite possible that we will increase real estate as a portion of the fund when we reach the 5% target," Mr. Slyngstad said in an interview.

He also said the fund is looking at infrastructure as well, which typically includes toll roads, airports and other assets that produce a steady stream of income over long periods of time.

The fund's move comes as a growing number of sovereign-wealth funds and state-run pension plans are rejiggering their portfolios to protect against inflation, analysts say. These megafunds, among the world's largest investors, increasingly are looking to invest in real estate, infrastructure and other assets that traditionally have been viewed as hedges against inflation.

According to a study by data tracker Preqin of 59 active sovereign funds, the number of these funds investing in property has increased to 56% at the beginning of this year from 51% last year, and the number of them investing in infrastructure has jumped to 61% from 47%.

Real estate and infrastructure have historically performed better than bonds in extended periods of rising prices. That is because inflation usually leads to rising interest rates, which cut the value of bonds because interest payments are fixed. Rents tend to rise in times of inflation. Infrastructure contracts also often include provisions for inflation adjustments.

Inflation concerns stem from growing budget deficits and loose monetary policies in developed countries and rising demand in developing markets. On Friday, China, which is fighting inflation, raised banks' reserve requirements for the third time this year.

"Investors globally are concerned about inflationary pressures arising out of significant monetary injections by central banks," said Zubaid Ahmad, global head of sovereign-wealth funds at Citigroup Inc.

Funds eyeing property investments also include South Korea's National Pension Service, with more than $250 billion in assets, and China's $300 billion state-run fund, China Investment Corp.

In recent years, countries from the oil-rich United Arab Emirates and Norway to big exporters like China have been funneling oil revenues or trade surpluses into wealth funds rather than government securities in a bid to seek higher returns. Assets managed by these state-run funds now total about $4 trillion, led by the $630 billion Abu Dhabi Investment Authority, the world's largest fund, according to Preqin.

The Norwegian fund draws its capital primarily from the country's oil sales. It returned 9.6% in 2010, driven by gains in global stock and bond markets, according to the fund's annual report released on Friday. Its equity holdings scored a return of 13.3% last year, while bonds gained 4.1%.

The fund is expected to close its first property deal by the end of this month—a £452 million ($745 million) investment in some 113 office and retail properties on London's Regent Street, one of the city's busiest shopping areas.

As the fund invests globally, it has extensive investments in foreign currencies including euros, pounds, dollars and yen. A slightly stronger kroner reduced the fund's market value by 8 billion kroner last year.

Mr. Slyngstad said the fund also is reshaping its "currency composition and duration of bond holdings" as part of its efforts to protect against inflation.

By LINGLING WEI

Source: http://online.wsj.com

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