Climbing stocks, weaker dollar push world’s biggest wealth fund to $1tr mark

Uptick in stock markets and a weaker U.S. dollar have combined to push Norway’s sovereign wealth fund to an all time high of $1 trillion for the first time on Tuesday.

The current high valuation of the fund could be traced to its huge investment in equities, which stands at 65.1 percent of total investment and the weaker dollar since its investment in North America is about 42 percent of investment portfolio.

In a statement, Norges Bank Investment Management said the milestone valuation was reached for the first time on Sept. 19 in Oslo.

“I don’t think anyone expected the fund to ever reach $1 trillion when the first transfer of oil revenue was made in May 1996,” Yngve Slyngstad, chief executive officer of the fund, said. “Reaching $1 trillion is a milestone, and the growth in the fund’s market value has been stunning.”

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But the extreme wealth has its downsides as the fund’s sheer size has made it a challenge to find markets big enough to invest in.

Meanwhile, Norway’s politicians are finding it hard to resist the temptation to raid the world’s biggest state piggy bank, with the petro-dollar addiction threatening to overheat the $400 billion economy.

Slyngstad had recently suggested it’s now largely fruitless for it to enter new asset classes such as infrastructure because that would be costly and only deliver a blip on overall returns.

The investor is also retrenching its global bond portfolio, cutting 23 currencies down to just three – the dollar, the euro and the pound. The fund says it doesn’t make sense to have more diversification in a world in which prices and rates are converging.

Its huge size has also driven the fund to respond to problems with trading by devising elaborate strategies to hide its selling and buying from anyone seeking to front-run its activities.

But being big has its advantages, especially for a lean organization like Norges Bank Investment Management. The fund only employs about 550 people in offices across the entire globe (Oslo, New York, London, Shanghai and Singapore). Management costs were equal to just 0.02 percent of assets in the most recent quarter, down from 0.07 percent five years ago.

The decline in costs comes despite the fund’s expansion into real estate. It’s snapped up prime properties in Times Square, the Champs Elysees and London’s Regent Street, among other locations. It owned 200 billion kroner ($26 billion) in real estate at the end of June.

For now, there’s been little discussion about breaking the fund up into smaller, more nimble entities, though the government is currently pondering a proposal to shift it out of the central bank and strengthen oversight.

So what lies ahead? Norway expects the fund to keep growing through 2025, when it’s predicted to hit 10.5 trillion kroner (or $1.3 trillion at today’s exchange rate). But such estimates are notoriously unreliable. Its current size already exceeds the milestone it wasn’t expected to reach until 2018.

With interest rates at record lows and returns hard to come by, the fund’s management is growing less optimistic. Central Bank Governor Oystein Olsen has warned the decline in oil prices means the fund may already have passed its peak.

Norway’s government last year made direct withdrawals from the fund for the first time in its history and is expected to take out about 70 billion kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 percent from 4 percent.

The fund has been given permission to raise its stock holdings to 70 percent from 60 percent, with an equivalent cut in bonds. That could help it eke out higher returns, or at least maintain the 8 percent annualized real return it’s had over the past five years.

But Slyngstad also recently said he sees fundamental issues with the global economic system and trade, which is being buffeted by increasing global political risk. And that’s not good for a fund that owns 1.3 percent of global stocks.