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Norway's Volatile Wealth Fund Hits New Peak

Andrew Ward, Financial Times
Wednesday, 20 Oct 2010 | 5:07 AM ET

Norway’s sovereign wealth fund has topped 3,000 billion Norwegian krone ($518 billion) for the first time, in a milestone that highlights the soaring financial reserves of western Europe’s biggest oil-producing state.

The Nordic country has been building the fund for 14 years in an attempt to preserve its oil wealth for future generations. Today it owns about 1 percent of all global stocks and counts as the world’s second biggest sovereign wealth fund after Abu Dhabi’s.

The new peak comes after a volatile period for the so-called “oil fund”, which declined 23 percent during the global financial crisis in 2008 before recovering most of the losses last year.

The fund has become one of Norway’s biggest sources of global influence, with the government using it to press foreign companies on issues such as corporate governance, labor rights and the environment. Wal-Mart , the US retailer, and Rio Tinto , the Anglo-Australian mining group, are among dozens of companies excluded from the fund for alleged ethical violations.

In another sign of muscle-flexing, Norway’s central bank, which manages the fund, last month sued Citigroup for losses resulting from alleged misstatements during the financial crisis.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, which manages the fund, said it had “grown faster and bigger than most people expected” when it was set up with an initial 1.98 billion Norwegian krone in 1996.

He attributed the growth to a surge in oil prices since 2002 and increased investment in equities, particularly in emerging markets, as the fund has become gradually more aggressive in its investment strategy. The fund raised its share of equity investments to 60 percent from 40 percent between 2007 and 2009.

Norway’s finance ministry, which oversees the fund, gave its approval this year for the fund to invest up to 5 percent of its assets in real estate, marking a further diversification of the portfolio.

The fund is intended to ensure that Norway continues to benefit from its oil windfall long after North Sea reserves run dry and to limit inflationary pressures by restricting the amount of oil revenues available for government spending.

In “normal” years the government may spend 4 percent of the fund’s value – although this rule has been flouted over the past two years as Oslo sought to cushion the impact of the global downturn.

At the end of June this year, a total of 2,379 billion Norwegian krone in capital had been poured into the fund since its inception, with returns amounting to 430 billion Norwegian krone.

Norwegian oil production has fallen by half from its peak a decade ago as North Sea reserves decline. But 40 percent of discovered resources on the Norwegian continental shelf have yet to be extracted, ensuring that capital will continue flowing into the fund for decades to come.

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