Posts Tagged ‘bonds’

norway flag

What would you do with £350 billion? – Invest like a Norwegian 

Norway, the land of the Vikings, northern lights and the generous folk who send a Christmas tree every year which Londoners light up and put in Trafalgar Square.

It’s also a land of great natural beauty but not many people. At the last count there were only around 5 million people living in 150,000 square miles which makes Norway the second least densely populated country in Europe.

It is a land of vast natural resources – minerals, wood, water, fish, hydroelectric power and most importantly oil and gas.

Oil was discovered in the North Sea in 1969, and since then the UK and Norway have benefitted from a windfall in oil revenues.

oil platform

In the UK, the oil revenues have been largely spent as we earned them. At first this sudden windfall increased the value of sterling, causing inflation that resulted in demands for wage increases from UK workers. The results of these wage increases were to increase costs for UK manufacturing making UK products uncompetitive in export markets.

mrs thatcher
During the course of the 1970’s and 1980’s, this led to a reduction in the UK manufacturing base, high unemployment and the North Sea oil money being spent by the Thatcher government on UK social costs. Many would say the UK has squandered the windfall from North Sea oil.

Norway saw what was happening in the UK, and decided to follow a completely different track.

viking ship

A nationalised oil company – Statoil was created and by the middle of the 1980s began to generate vast cash inflows.  The government of Norway decided to create one of the first “Sovereign Wealth Funds”, a term that is commonly used today, but hadn’t been invented back then so they unimaginatively called their fund “The Government Pension Fund Global”. Despite this name, the fund is more commonly referred to as “The Petrol Fund”.

This fund was set up to invest the cash flows being created by Norway’s North Sea oil windfall on behalf of the nation, to provide for the future needs of the Norwegian population.

Two of the key aspects of the fund were to invest only in the safest asset classes (initially just safe government bonds but now extended to equities and property) and most importantly to only invest outside of Norway.
This decision was taken to prevent inflation in Norway, and to make sure that no future Norwegian governments would be tempted to spend the money.

This wise decision has certainly served the current and future citizens of Norway well.


Interestingly, this is completely the opposite of the French Sovereign Wealth Fund set up by Mr Sarkozy in recent years that has the objective of investing only in the equities of French companies so as to protect French industries from the threat of foreign ownership. Time will tell which has been the wiser path.

In the last 10 years, the Norwegian sovereign wealth fund has grown to a massive £350 Billion.


To put this into context, this is considered just slightly LARGER than the similar fund belonging to China, and only slightly smaller than that belonging to the United Arab Emirates.

Unlike just about all other sovereign wealth funds which are clouded in secrecy, the Norwegians are very open about their funds and are keen to publish exactly what they do with their money and how effective their investments are.

Also like other Sovereign Wealth funds, the Scandinavians use their fund for political purposes, but these purposes are entirely different from other funds.

white dove

The Norwegian fund carries out extensive research into the ethics of companies and countries where they are investing.  Investments into companies having anything to do with weapons technology or polluting industries are withdrawn. Of course, interpretation of these factors to be politically interpreted as you will notice in the table below that they are one of the largest investors in BP – despite the huge oil spill in the Gulf of Mexico in 2010.

In a world of very volatile investment markets and very low investment returns, it can be hard for an individual to know where to invest their money to make healthy but safe investment returns.

question mark

Imagine trying to do that if you have £350 Billion pounds of your countries nest egg to deal with!

So, here is a chance to see what asset allocations the second largest investor in the world uses.

Firstly – asset allocation – here is how the Norwegians allocate their investments;

60% equities

35% fixed income

5% property

Fixed Income (Bonds)

Let’s look at where they invest their biggest proportion of their wealth into fixed income (bonds).

















European   Inv Bank




With the possible exception of Italy, whose bonds have recently been an area for concern, the majority of the investments from Norway have focused on the developed world, especially the United States. This has certainly been due to the assumption that these are considered the safest assets. It will be interesting to keep an eye on these investments in the future to see if the Norwegians begin to shift their focus more into developing economies. These were previously considered to be a higher risk, but as the debt crisis continues and the risk in the developed world increases, there might be a change in focus.

How about Greek Bonds?

The 2012 Q1 report explained that the Norwegian fund held Greek government bonds to the value of 785 Million Euros – on which they had suffered a serious 50% loss in Q1 2012. It is fair to say that they will probably not be back for more Greek bonds in the future.

Equity Investments

The Norwegian fund publishes details of every equity position that it holds. This list runs into investments of thousands of companies spread all over the world. However, their top 10 Equity holdings are as follows;

Company Country


Royal   Dutch Shell UK


Nestle Switzerland




Apple US


BG   Group UK


Novartis Switzerland


Vodafone UK




Exxon   Mobil USA


Roche Switzerland


It is interesting to note that the largest holdings of the fund are based in the UK and Switzerland.

One final thing to note – when you have such a large fund to invest, currency risk can be a real issue.

The Norwegians keep the bulk of their investments demominated in just four currencies with 80% of the funds investments denominated in either Euros, sterling, dollars or yen.

Managing £ 350 bn is quite a headache for futre generations of Norwegians, but what a great headache to have and one which we all wish we had.

Sadly for the UK,  its a headache we could easily be suffering from but our North Sea Oil money is already spent and so our focus must remain on our debts.


Transform Accounting are Chartered Management Accountants and Tax Technicians able to assist with personal tax returns, sole traders and company payroll whilst specialising in limited companies, consultants, contractors and business start-ups. Fixed fee packages are available as are free initial consultations. Customer references are available on request.

See www.transformaccounting.co.uk or contact by telephone on 01277 365447 or by e mail at info@transformaccounting.co.uk

Essex Small Business AccountantsTransform AccountingThe Essex Accountants

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Investment tips – Why Position Sizing is key to any investment portfolio

An individual investment portfolio will at any time be comprised of a number of positions, and usually an element of cash waiting on the side lines for investing opportunities.

But when you have a conviction for an investment opportunity, have completed your research and are ready to put on a trade, all investors are faced with the question of how large a position to take in any single investment.

How you size your stock trading position can be equally as important than the actual trades you make.

If your position size is wrong by being too large, even if your investment conviction (ie – the reason why you decided to make the investment in the first place) is right you may get knocked out of your trade too early if you suffer some short term volatility and close the position out.

When it comes to investment position sizing, you have to be in your comfort zone, because if you are not then fear will dominate your trades causing you to miss out on potential upsides if your convictions turn out to be correct.

One thing that many investors do wrong when handling their own portfolio is to put on an individual investment in a bigger position than they are comfortable with and because of that they can be right on the conviction, but if the position goes against them in the short term they panic and get out of the trade prematurely and miss out on the upside.

Getting position trading right is a fundamental key to successful individual investing. A smaller position in a high beta stock means that the investor is more comfortable and feels able to live with short term fluctuations, allowing them to stay with their position longer and to follow the investment idea through with greater conviction.

It is a generally held consensus that portfolios should not exceed 2-5% in any one position.

Of course, the investment world is always made up of conflicting opinions, and every individual circumstance and risk appetite is different.

Many successful individual investors would balance their portfolios with larger positions in lower risk stocks (eg – utilities, world dominating dividend paying stocks etc) and much smaller positions in more volatile but potentially lucrative growth high beta stocks, allowing them to feel comfortable with setting higher stop losses and riding out short term fluctuations.

Small Business Accountant ChelmsfordTransform AccountingEssex Small Business Accountants

Disclaimer – The information presented in this article is intended for education purposes and is not intended to be used as the sole basis for any investment decision nor should it be construed as advice intended to meet the investment needs of any investor. The author may hold positions referred to in this article. Please perform your own research or contact a qualified financial adviser prior to making any investment decisions.

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Investor Tips – What’s the best diversified portfolio mix?

As with anything related to investments, opinions can vary wildly and it is often hard to know which is right or wrong.

But conventional thinking tells us that a diversified portfolio is made up a mixture of stocks and bonds with a small element of alternative investments.

The standard investor portfolio should generally contain 10 – 30 different individual stocks and bonds, and possibly a few mutual funds.

But what about the balance between stocks and bonds?

The mix is usually around 60% stocks and 40% bonds.

A mix of 70% stock and 30% bonds is considered more aggressive.

Generally, the higher the percentage of stocks, the more aggressive the portfolio.

Alternatively the higher the percentage of bonds, the more defensive the portfolio.

But what if you don’t have the time to research up to 30 different stocks and bonds?

The use of ETF’s (Exchange Traded Funds) has now made it possible for the average investor to easily purchase a simple bond or stock index whilst paying very low management fees (unlike mutual funds where fees can often exceed 2% per annum, regardless of performance).

This could be done with just two ETF’s – “DIA” represents the Dow Jones Index of America’s leading 30 shares, and this could be combined with the ETF code “TLT” which represents US government treasury bonds.

Just by buying these two investments in a 60/40 ratio, you can achieve low cost diversification in a relatively low risk investment.

Accountant Loughton – Transform Accounting – The Essex Accountants

Disclaimer – The information presented in this article is intended for education purposes and is not intended to be used as the sole basis for any investment decision nor should it be construed as advice intended to meet the investment needs of any investor. The author may hold positions referred to in this article. Please perform your own research or contact a qualified financial adviser prior to making any investment decisions.

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Diversified portfolio

Many investors have heard of the term “diversified portfolio”.

It means to have a collection of investments in different items and different sectors.

It is a generally accepted principle that a diversified portfolio carries lower risk than one that is entirely focused in a single asset class.

Here is a simple example of diversification in practice.

If you invested £100,000 in a property, and over the course of the next 5 years, that property had fallen in value to £95,000, the investor would have a net loss of £5,000.

Property Purchase Price               : £100,000
Sale Price                                         : £ 95,000
Loss                                                  : £ (5,000)

However, had he invested half in a property with the same decline in prices, and the other half in gold which rose 20% in 5 years, he would have a net gain of £7,500.

Property Purchase Price                 : £  50,000
Property Sales Price                        : £  47,500
Loss                                                    :  £ (2,500)

Gold Purchase Price                        : £  50,000
Gold Sales Price                                : £  60,000
Profit                                                   : £  10,000

Overall Profit                               : £   7,500

In this example, diversification worked well – this is where the term “not putting all your eggs in one basket” applies.

Of course, if he had invested all of his £100,000 in gold, then he would have made a gain of £20,000, but at greater risk.

So, what can you put into an investment portfolio to give greater diversity?

Cash – The safest asset class of all. Investments in banks and building societies will generate low, but very safe returns. In the UK, Premium Bonds and National Savings would fall under this heading.

Government Bonds – Usually considered one of the safest asset classes, government bonds are issued by most countries as a way of raising financing. These are also referred to as “Gilts” in the United Kingdom. Typically government bonds pay a low rate of interest.

Corporate Bonds – Bonds issued by companies which typically pay varying rates of interest depending on the considered level of risk of the company who issued the bonds.
EG – Microsoft bonds would be considered very low risk, and pay a low level of interest, a medium sized IT company would be considered high risk and would pay a higher level of interest.
Both government and Corporate bonds, should be viewed as a type of loan where you are the lender and the issuer is the borrower. These loans would be over a fixed period of time, and the amount of interest would be fixed. At the end of the loan period, the issuer will repay the face value of the bond.
There are two risks associated with owning a bond – the first is the issuer going bust and being unable to repay the bond, and the second is an increase in inflation resulting in a decline in value of the fixed interest rate coupons (or payments).

Growth Stocks –Growth  Stocks are considered higher risk than bonds, but are often considered to generate a higher return in the long run. There have always been time periods (such as 2008) when stock markets suffer from very sudden declines in value. A growth stock is considered to be from a company which does not pay dividends and where the investor hopes to increase his asset value through an increase in share price over time.

Dividend Paying stocks – Generally, dividend paying stocks are considered lower risk than growth stocks (but there are always exceptions such as Lloyds bank since 2008). Paying Dividends are the company’s mechanism for sharing the profits of the company with its owners (its shareholders). In the UK, the largest dividend paying companies are Vodafone and BP.

Mutual Funds – Because picking stocks and building your own portfolio can be difficult, a lot of investors trust fund managers to invest money on their behalf in mutual funds.
Examples of mutual fund managers would include Fidelity and Aberdeen asset management.
These companies operate a number of funds, often focusing on different geographical locations or market segments and attempt to pick shares which will outperform the market.
Fund managers will usually charge a fee of approx. 2% per year as a management fee in return for looking after your investment. This fee is charged every year even if the fund manager loses money on your investment. Mutual fund units can usually only be bought or sold at one point during a day, and it is common to have to give notice of several days to make a sale or purchase.

Exchange Traded Funds – also known as ETF’s, are bought and sold like a share (through a stockbroker). An ETF is a fund that is made up of a number of investments – eg – the ETF called “SPY” is made up of the whole Standard and Poors 500 index. This is a cheap way of effectively buying a portion of the whole index.
ETF’s are becoming more popular as investors are realising that they do not attract the large management fees of a mutual fund. In addition, ETF’s can be bought or sold at any point during the trading day. There are now several hundred ETF’s available and this ranges from stock indices, through to gold (GLD) and even one for agriculture which goes by the code of MOO!

Leveraged and Short ETF’s – Leveraged ETF’s allow you to purchase for example an S&P500 index which is leveraged to give you twice or three times the movement on the index. This is referred to as 2 or 3 times or 2x or 3x.
So, if the market index increases by 3%, the 2x leveraged ETF increases by 6%, whilst the 3x leveraged ETF increases by 9%.
Also, negative or “short” ETF’s now allow you to bet that a market index will decline. If the market declines, then your investment increases in value.
These ETF’s carry far greater risk and are more volatile.

Property – During the property bubbles of the 1990’s and early 2000’s, buy to let investments fueled by easy and cheap credit became very popular and during this period, those most leveraged with borrowings experienced excellent returns. As many property markets have either declined or stabilised and credit has dried up, investments in property have largely returned to professional landlords. As a long term investment, directly owning property plays an excellent role in providing portfolio diversification.

Gold and Silver – Precious metals can be a good “investment” as stores of value during periods of high inflation.  The downside is that precious metals are unproductive assets that generate no interest or dividend payments. Investments can be either in physical gold such as krugerrands, Maple Leafs or Sovereigns or through ETF’s (Exchange Traded Funds).

Alternative Investments – This sector can include assets such as classic cars, antiques, fine wines, stamps, coins, vintage share certificates and even vintage musical instruments.
All of these assets experience ups and downs in value and can be considered high risk, however it is worth bearing in mind that these assets can often be quite illiquid (difficult to return to cash).
Also, many of these asset classes rise during good economic times, and decline in value during a recession. These can be considered better investments if some pleasure is gained by the owner whilst in their possession.

So, a wide variety of investments are available to investors today. In order to reduce risk in your portfolio, diversification is key.

However, diversification just for diversifications sake is not recommended.

Ie – If an asset class is clearly in a downtrend, purchasing that asset class just to gain diversification is not to be recommended. Choose carefully.

Accountant Romford – Transform Accounting – The Essex Accountants

Disclaimer – The information presented in this article is intended for education purposes and is not intended to be used as the sole basis for any investment decision nor should it be construed as advice intended to meet the investment needs of any investor. The author may hold positions referred to in this article. Please perform your own research or contact a qualified financial adviser prior to making any investment decisions.

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