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World’s largest sovereign wealth fund is undergoing drastic changes and ratcheting up risk appetite

Kristian Helgesen | Bloomberg via Getty Images

The world's largest sovereign wealth fund will undergo the most drastic changes to its mandate in decades as it ratchets up investment risk and pulls back on the amount of oil money it can spend if the Norwegian government's proposals are approved.

The 7.48 trillion Norwegian krone ($903 billion) fund – the largest sovereign fund by assets under management - currently receives all of Norway's oil and gas income and parliamentary approval would be required to ensure the changes are ratified. The fund currently targets an equity allocation of around 60 percent but Prime Minister Erna Solberg's government hopes to see this dialed up to 70 percent.

"The Government Pension Fund Global has a long investment horizon. The assessments of the equity share is henceforth based on long term considerations, including assessments of expected return and risk and the state's ability to carry risk in the Fund. Returns are likely to be lower going forward, as assessed by two separate public commissions and Norges Bank. We must adapt to this fact and therefore propose to adjust the return estimate downwards," Siv Jensen, Norway's Finance Minister told CNBC via email on Friday.

The vast reach of the fund is exemplified by the fact it already invests in 78 countries, owning around 1.3 percent of listed companies worldwide and 2.3 percent of listed companies in Europe.

Bonds, which currently have a target allocation of around 35 percent of investments, are set to be the spurned asset class as the fund attempts to boost overall returns. In general, equities have both a higher risk and expected return profile than fixed income investments. Real estate will continue to comprise the relatively small remainder of allocated funds.

This change is being pushed forward alongside another which determines the amount of the fund that government can spend in its annual budgets. The proposal is for the current rate of 4 percent to be dropped to 3 percent, an initiative largely driven by the fund's rampant growth since its 1998 launch.

The fund achieved an average growth rate of around 5.6 percent (before expenses) between 1998 and 2015, leading to an absolute growth in assets of around twenty times and a treasure chest now almost twice the size of Norway's economy. Last year marked the first year in its history that the government removed more money from the fund than the latter received from oil revenues due to the slump in the commodity's price.

Norway's central bank governor has been vocal over the past several months in asserting that the government must desist from spending so much of the fund's assets.

"It would be unwise to increase petroleum revenue spending from today's level even if the [fund] continues to grow," Øystein Olsen, governor of Norges Bank stated on Thursday, adding that the government risked running a budget deficit of up to 8 percent of GDP (gross domestic product) excluding contributions from oil and shipping.

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