A manager weighs banknotes on a scale at a bakery in Venezuela. (Photographer: Manaure Quintero/Bloomberg)

World’s Biggest Wealth Fund Struggles Under Weight of Trade War

(Bloomberg) -- Norway’s $1 trillion wealth fund managed to make $20 billion last quarter thanks to the oil and gas stocks that it ultimately wants to exit. But its longer term prospects suffered a blow as a deepening global trade war threatens the fund’s return model.

The world’s biggest wealth fund benefited in the months through June from a rally in U.S. markets, fueled by tax cuts. Like many global investors, however, it’s warning about the impact on the world economy of rising protectionism after U.S. President Donald Trump imposed tariffs on key trading partners.

“The prospect of increased trade barriers is something that is high on everybody’s agenda,” Trond Grande, the fund’s deputy chief executive officer, said on Tuesday. “It’s fair to say that increased trade barriers, or even trade wars, will not be beneficial for the fund as a long-term global investor.”

The fund delivered a return of 1.8 percent in the second quarter, or 167 billion kroner ($20 billion), after a loss in the first quarter. Its total stock holdings rose 2.7 percent, while bonds were unchanged and real estate provided a 1.9 percent return.

World’s Biggest Wealth Fund Struggles Under Weight of Trade War

Investing Norway’s oil wealth abroad, the fund has been set up to capture the fruits of globalization and the growth it drives, a philosophy that’s now being challenged. The investor, which owns about 1.4 percent of global stocks, also sticks closely to indexes, making it hard to navigate around global turmoil.

The fund lost 5.7 percent in emerging market stocks and 4 percent on Chinese equities. The biggest sector driver for its returns were oil and gas stocks, which it has proposed divesting. Financial stocks were the weakest performers, led by Banco Santander SA.

“In the second half of the period, the prospect of increased trade barriers and a weaker growth outlook in Europe, China and emerging markets had an adverse effect,” the fund said. “Political uncertainty in Italy impacted negatively on European financial markets.”

Nearing 70%

At the end of the quarter, the fund held 66.8 percent in stocks, 30.6 percent in bonds and 2.6 percent in real estate. The return missed the benchmark index by 0.2 percentage point.

Equity markets regained some momentum in the quarter after tumbling at the start of the year amid a spike in volatility. The fund is also skewed more toward Europe, missing out on some of the bigger tax-cut fueled gains in the U.S. market.

Even so, it’s a major shareholder in the U.S. tech giants. Its largest stock holdings at the end of the quarter were Apple Inc., Amazon.com Inc. and Microsoft Corp. Its largest bond holdings were in U.S. Treasuries, followed by Japanese and German government debt.

The fund is also in the midst of increasing the portion of stocks in its portfolio to 70 percent after a go-ahead last year. The remainder is held in bonds. It can also hold a maximum of 7 percent of its investments in real estate.

Weighed down by negative interest rates over the past few years, the government recently lowered its expected real return target to 3 percent from 4 percent. A slump in crude prices also forced to the government to make its first ever withdrawals in 2016, but that has now ended. Stoked by a recovery in oil prices and rising petroleum income, the government in June made its first deposit to the fund in almost three years.

Outflows from the fund slowed to 2 billion kroner in the second quarter.

©2018 Bloomberg L.P.