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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.

sarkozy

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.

norwegian-krone

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).

Country

£’Millions

USA

28,912

UK

9,339

France

8,402

Japan

6,877

Germany

6,205

Italy

2,801

Canada

2,566

European   Inv Bank

2,381

Australia

2,112

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

£’Millions

Royal   Dutch Shell UK

2,950

Nestle Switzerland

2,839

HSBC UK

2,451

Apple US

2,397

BG   Group UK

2,023

Novartis Switzerland

1,862

Vodafone UK

1,861

BP UK

1,823

Exxon   Mobil USA

1,779

Roche Switzerland

1,660

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.

 

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