The Norwegian Government’s 3055 billion kroner ($544.9 billion) pension fund lost 8.8 per cent during the third quarter of this year, on the back of falling share markets. But its fund manager says most of the fund’s new capital inflows are still being pumped into global share markets.
The overall loss in the third quarter is the fund’s second-weakest quarterly return in its 21-year history and 0.3 percentage points lower than the return on the benchmark indices.
“Europe’s debt crisis and fears of a global economic slowdown weighed on stocks in the quarter,” says Yngve Slyngstad (pictured), chief executive officer of NBIM, the investment arm of Norway’s central bank.
“Most of the fund’s new capital was placed into equities to exploit the declines and take advantage of our long-term perspective.”
The fund lost 284 billion kroner in the period, partially offset by capital inflows from the Government of 78 billion kroner and a weakening of the krone against several major currencies, which increased the market value of the fund by 150 billion kroner.
The Norwegian Government requires the fund to have between 50 per cent and 70 per cent of the fund’s market value invested in equities, 30 to 50 per cent in bonds, and 0.5 per cent in real estate.
It currently has 55.6 per cent of the fund in equities, 44.1 per cent in bonds and 0.3 per cent in real estate.
European financial stocks were the fund’s worst performing equity segment, losing 27.3 per cent in the quarter, measured against a basket of international currencies? Financials generally lost 22.1 per cent in the quarter, after sovereign debt concerns battered the sector.
Financial stocks make up the fund’s biggest equity sector, accounting for 20 per cent of stocks at the end of the period.
The fund’s worst performing stock investment, in nominal terms, was BNP Paribas, followed by Siemens and Daimler. The best performers were Apple, Vodafone and IBM.
Investments in oil and gas stocks constituted 11 per cent of equity holdings. The fund’s healthcare stocks performed best, losing 7.2 per cent in the quarter.
About half of the fund’s equity investments are in Europe (with a return of -20.7 per cent for the quarter); 35 per cent in the Americas, Africa and the Middle East (-13.4 per cent for the quarter); and 15 per cent in Asia and Oceania (-12.4 per cent).
At a country-specific level, US and UK stocks underperformed the benchmark, while Spanish and Australian equities beat the benchmark.
Generally, equity investments lagged behind global benchmark indices for stocks from the FTSE Group by 0.5 percentage points in the quarter. About 85 per cent of this negative return came from internal management and the remainder from external management.
Broken down into sectors, the basic materials area, which includes metal fertiliser and chemical producers, was the worst performer relative to its benchmark.
Holdings in technology stocks outperformed the benchmark.
A bright spot for the fund was its bond portfolio, which returned 3.7 per cent in the third quarter, as measured against a basket of international currencies.
Gains were helped by ongoing uncertainty about the world economy, with increased demand for “safer” investments, from countries such as Germany, France, the UK and the US.
The fund’s government bond holdings returned 7 per cent in the quarter.
Securitised debt – typically bonds secured by home mortgages – was the weakest of the fixed-income investments, followed by corporate bonds. Securitised debt returned 0.3 per cent and corporate debt 0.7 per cent for the quarter.
Overall, the return on fixed-income investments matched the benchmark.
This year the fund also expanded its investments to include real estate. In April it bought a 25 per cent stage in The Crown Estate’s Regent Street portfolio in London.
In its second foray into real estate in July, the fund bought a 50 per cent stake in seven properties in and around Paris for 702.5 million Euros ($972.1 million).
Over the past three years the fund has made a 4.86 per cent return, exceeding its benchmark by 0.79 percentage points. Over a 10-year period it has returned 4.2 per cent, outperforming its benchmark by 0.24 percentage points.
The Government Pension Fund Global is NBIM’s largest investment mandate.
The fund was set up in 1990 to manage Norway’s petroleum revenues.