Norway SWF posts booming quarter

Norway’s sovereign wealth fund, the $456.4 billion (NOK 2,549 billion) Government Pension Fund – Global, returned 13.5 per cent for the quarter due to improved liquidity in fixed income instrument and climbing equity markets, as the fund continued diversification within emerging markets.

The strong performance brought in $29.2 billion for the fund, which was added to $8.8 billion in new inflows, and drove the fund’s year-to-date performance to 21.8 per cent.

With a 17.7 per cent return from its equities portfolio, and 7.2 per cent from its fixed income book, the fund beat its benchmark portfolio by 1.5 per cent for the quarter after adjusting for currency transactions.

But the fixed income portfolio delivered an excess return of 3.3 per cent, compared to the marginal outperformance of the equities investments, which contribute 0.2 per cent.

The outperformance of fixed income instruments was attributed to payoffs from illiquid positions taken by the fund before the financial crisis broke, including securitised debt and corporate bond investments. The excess returns from equities were sourced from internally managed portfolios, with a marginally negative contribution from external equity managers.

“In a quarter when equity markets rapidly advanced, the different strategies for our active equity management had dissimilar and non-systematic exposure to underlying market movements,” the fund stated.

Norges Bank Investment Management, the investment arm of the fund, has awarded 14 specialist mandates for external managers so far this year, eight of which target emerging markets. At the end of September, it was invested with locally based managers in China, India, Russia, Poland, Turkey, Indonesia, Malaysia, Thailand, Brazil and South Africa.

Compared to the first nine months of 2008, the performance-based fees paid by the fund to external managers rose from $46.4 million to $221.8 million by the end of September. The vastly larger aggregate fee reflected better performance – which are not awarded on the basis of market movements but on outperformance over time, typically rolling 36-month periods – and the appointment of additional managers.

The fund’s equity portfolio rose 2 per cent to comprise 62 per cent of the fund’s assets during the quarter. At the end of September, the found owned, on average, 1 per cent of the world’s listed companies at the close of the third quarter.

It noted that absolute volatility at the end of September was “not significantly higher” than mid-2007, before the market collapse. It referred to a key financial risk indicator in the money market, the spread between US Treasury Bill yields and interbank lending rates, which “narrowed further in the third quarter to levels seen before the start of the financial turmoil in mid-2007″.

“The liquidity crisis therefore seems to be over,” the fund concluded.

Between January 1, 1998 and September 30, 2009, the fund produced an annual return of 4.5 per cent.