Biggest Wealth Fund Faces Verdict on Proposal to Dump Currencies
Biggest Wealth Fund Faces Verdict on Proposal to Dump Currencies
(Bloomberg) -- Currency and bond traders better be on their toes on Friday.
After a long deliberation, Norway’s government could decide to allow the country’s $1 trillion sovereign wealth fund to dump a wide swath of currencies, including the yen and most emerging markets. The government may also free the fund to venture into unlisted infrastructure and point to tighter restrictions on coal investments.
The Finance Ministry’s annual white paper is slated to be released at 11:45 a.m. in Oslo on Friday. Here’s what you need to know:
Bond Index
The fund in 2017 proposed sweeping changes to the bond index it models its investments on after it was allowed to raise its equity holding to 70 percent from 60 percent.
Those included cutting the number of currencies to three -- the euro, dollar and pound -- from 23. It would include dropping the Japanese yen and many emerging market currencies. It sees less benefit from diversification in fixed income because it already takes considerable currency risk in its stock portfolio. The fund also proposed capping bond maturities at 10 years and getting rid of corporate bonds.
The purpose of the bond holdings is to serve as “a diversifier for the whole portfolio,” the fund’s chief executive officer, Yngve Slyngstad, said in a recent interview with Bloomberg. While that means shedding currencies, he said that active management would probably mean that it would still invest in currencies that aren’t part of the index should the government agree to the changes.
The proposal could go nowhere, though. The plan was criticized by economists and academics and a government-appointed expert committee recommended against it. The Finance Ministry has also said that it’s important to limit deviations between the fund’s index and its wider investment universe since that makes it easier to track how the fund is performing.
Stock Rebalancing
With the equities now making up 70 percent, the fund has argued that it needs more leeway in its rebalancing rules. They stipulate that if the fund strays by 4 percentage points from either side of 70 percent, it needs to adjust by either selling or buying stocks.
The fund argued last year that it should be given more time to rebalance the portfolio when it strays from the target, compared to the end of the following month currently. At the same time, it recommended that the band be tightened to 2 percentage points.
Unlisted Infrastructure
The fund could get the green light to invest in renewable energy infrastructure projects. The Conservative-led government has been less than keen to allow unlisted assets, rejecting both infrastructure and private equity in the past. But a year ago it opened the door to potentially allow renewable-energy infrastructure in the fund’s environment-related mandates.
The opposition and the government’s junior partners were positive, and have also said the mandates, currently set at a range of 30 billion kroner ($3.5 billion) to 60 billion kroner, should be expanded.
Coal Ban
In 2015, the fund was banned from investing in companies that get more than 30 percent of their revenue or activity from thermal coal. Since then, some opposition politicians and environmental groups have said that the rules don’t go far enough because they allow the fund to keep stocks in huge producers such as Glencore Plc.
Parliament last year asked the government to review whether the restrictions are efficient enough and present the findings in the next white paper. While the government’s dominant Conservative and Progress parties are skeptical to imposing limits on the fund, they may eventually have to bend to Parliament’s will if there’s a majority to tighten the rules.
Climate Baddies
The fund has an extensive list of ethical guidelines, including the prohibition of companies responsible for “unacceptable” greenhouse-gas emissions. But the fund argues the climate rule is unclear and has yet to act on a proposal by its ethics watchdog to exclude five unidentified companies. In November, it asked the Finance Ministry for a clarification.
Read more: Fund balks at investing climate baddies
To contact the reporters on this story: Mikael Holter in Oslo at mholter2@bloomberg.net;Sveinung Sleire in Oslo at ssleire1@bloomberg.net
To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net
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