Norway’s $1 trillion wealth fund ends bet on higher rates

Bloomberg

Norway’s $1 trillion wealth fund ended a long-running bet on higher interest rates as market turmoil drove a quarter of its massive bond portfolio into yields below zero.
After presenting second-quarter earnings in Oslo on Wednesday, Norges Bank Investment Management’s Deputy Chief Executive Officer Trond Grande said the fund is now no longer short duration compared to its benchmark, meaning that it will profit relatively more from falling rates. The fund has moved to a duration of about 7 years from about 5 years, he said.
The shift wasn’t a “top down” decision, but a result of moves by its portfolio managers, Grande said.
The shift comes as bond yields plunged with large swaths of Europe’s bond markets now with negative yields and US Treasury market experiencing an inversion of its main yield curve.
The fund reported on Wednesday that it delivered a return of 3%, or $28.5 billion, in the second quarter, led by a 3.1% return on bonds. Its stocks rose 3.0% and its real estate 0.8%.
The Oslo-based fund, which holds 1.4% of global stocks on average, closely mirrors the broad markets, though it has some leeway in how it weighs indexes and strays from its benchmarks. The fund snapped up stocks in a selloff at the end of last year, then hitting its long-term target of 70% in equities.
The investor, built from Norway’s oil and gas riches, has pared losses from 2018 but faces a tough market outlook amid a turbulent month.
The fund said it has more than 600 billion kroner in bonds with negative yields, or about a quarter of its fixed-income portfolio, adding pressure as it struggles to keep up with its 3% real return target.
The largest stock holdings at the end of the quarter were Microsoft Corp., Apple Inc. and Amazon.com Inc. Its largest bond holdings were in U.S. Treasuries, followed by Japanese and German government debt.
In the second quarter, the government deposited 6 billion kroner into the fund, down from 8 billion kroner in the first quarter.
The fund’s return in the quarter missed its benchmark by 0.2 percentage point.