The first quarter was a difficult one for the Norwegian sovereign wealth fund. It lost, according to various sources, more than 115 billion euros over the period for the first time in its history. This loss follows the forced sale of the fund’s assets to cover the Norwegian government’s withdrawals amidst the country’s worst economic recession in 50 years. Let’s dive into the details with Boris Lefebvre.
Historic fall
At the end of the worst quarter for equity markets in several decades, the sovereign wealth fund set up by Norway in the 1990s to reinvest oil revenues saw its value fall by more than 115 billion euros.
The world’s largest fund lost around 15% of its asset portfolio value in the first quarter of 2020. The equity portion of its portfolio fell by more than 20% over the first three months of the year, while the bond portion rose by 1.3%. « The market situation is very difficult, » acknowledged Yngve Slyngstad, head of the sovereign fund. « However, the fund has a long-term horizon, » he added.
The Norwegian Sovereign Wealth Fund does not specify its portfolio allocation or the proportion invested in equities at the end of March. According to its own rules, if the fund loses more than 2% compared to the target of 70% (of equity holdings), it must rebalance its investments.
In the past, the Norwegian sovereign wealth fund would buy shares to rebalance its portfolio. But in the present case, Yngve Slyngstad indicated that rebalancing will probably be done by selling bonds to cover the Norwegian Government’s withdrawals. The Norwegian government has already withdrawn NOK 67 billion in the first quarter, he said.
The root causes of the drawback
Established in 1990 to ensure that the state’s oil revenues are used for the benefit of future generations, the Norwegian Sovereign Wealth Fund is one of the world’s largest investors with holdings in more than 9,200 companies. It holds the equivalent of 1.5% of the world’s capitalization. Its largest holdings include Apple, Microsoft, Nestlé, Amazon and Alphabet, the parent company of Google. The fund, which advocates ethical investment choices, reduced its holdings in oil companies.
It is now clear that the collapse of the stock markets is costing Norway’s sovereign wealth fund dearly. It now weighs only €875 billion, after losing more than €115 billion. The reason for this is the 23% plunge in its total equity investments, which account for two-thirds of its global portfolio.
Other major fluctuations are foreseeable in the coming weeks, warned the fund manager, Yngve Slyngstad. In the meantime, this loss does not completely erase the historic gain of 1,692 billion kronor, up 20% from last year’s gain of 1,692 billion kronor in 2018, he said. This gain was due to « positive stock market returns in all its major markets and sectors ».
Conversely, the coronavirus crisis led to significant disparities in the fund’s investments: oil stocks dropped by 45% and the technology sector by 14%. Investments in bonds and real estate, which make up the rest of the portfolio, have returned almost zero since the beginning of the year.
