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Norway's sovereign wealth fund should raise the proportion of its investments in equities to 70 percent from 60 percent to the detriment of its bond holdings, the majority on a government-appointed commission said on Tuesday.
Its chairman dissented, saying equity holdings should be cut.
If the increase was done today, it would mean the world's largest sovereign wealth fund, currently valued at $875 billion, would move $87 billion into equities away from government bonds, whose low interest rates are dragging down the fund's return.
Any reallocation of the fund's assets is expected to take several years, however.
Eight of the nine members on the panel - made up of two former finance ministers, economists and financial investors - said a higher share of equities would increase the expected return of the fund and the contribution to the state's budget.
"It entails more volatility in the value of the fund and a higher risk of a decline in its long-run value. The majority is of the view that this risk is acceptable," commission member Hilde Bjoernland told a news conference, when presenting the view of the majority on the commission.
The fund can currently invest up to 60 percent of its investments in equities, 35 percent in fixed income and 5 percent in real estate. It holds stakes in around 9,000 companies across 78 countries. It cannot invest in Norway.
Finance Minister Siv Jensen partly appointed the commission because the fund's bonds returns have been hit by low interest rates worldwide.
"We know that we have a very low interest rate regime globally and since (more than a third of the) portfolio is invested in bonds, that will of course affect the return of the fund over time, especially if interest rates remain at a very low level for a long time," she told Reuters.
The central bank, which manages the fund, will respond to the proposals in December, and the Norwegian finance ministry will use the conclusions in its annual white paper in April, which is expected to include a recommendation to parliament.
The head of the commission, Knut Anton Mork, dissented with the majority and said that the fund should cut its investments in equities to 50 percent of the total instead and transfer the difference into government bonds.
The fund is now so big - two-and-a-half the size of the country's gross domestic product - that swings in the fund's return would make the state's withdrawals from the fund to use in the state's budget less predictable, he said.
"My main concern ... is the risk of boom and bust in government spending, services and tax rates," Mork, a former chief economist at Handelsbanken in Oslo, told Reuters.
A lower share of equities in the portfolio would mean the fund would have a lower return. "Fiscal policy needs to adapt to this fact," he said.
Currently government can spend an average of 4 percent of the wealth fund per year, the expected long-term return of the fund, but low interest rates and other market conditions make it unlikely that the fund can earn returns to replace that amount, economists say.
The commission did not give a recommendation for what the spending rule should be in the future, but estimated the real rate of return to be just 2.3 percent per year for the next three decades under the current asset allocation, changing the fiscal spending rule, in place since 2001, would be a major policy departure. Until recently, any suggestion of changing it has been rejected by successive prime ministers, but earlier this month Prime Minister Erna Solberg said it should be tightened.