The Norwegian Oil Fund Surges, Investors Should Take Note

Norway’s sovereign wealth fund, one of the world’s biggest investors and the world’s largest sovereign wealth fund grew by $100 billion in 2012, making 2012 its second-best year on record. The fund rose in value by 13.4% last year. It is now worth circa $710 billion, which is 40% more than the value of the entire Norwegian economy. Known as the ‘oil fund’, it invests revenue from Norway’s lucrative oil industry for the country’s future. Stocks returned 18.1%, while its bond investments climbed 6.7%. Real estate investments returned 5.8%.

While the performance reflected the development in the global markets, US and global investors can take a lesson from the fund’s well-executed shift in investment strategy. While this fund is a sovereign wealth fund, funded by the country’s excess oil revenue, individual investors may be well-served if they follow the lead of the fund in their investment strategies. The fund’s strategies may provide insight for individual investors to consider when looking for investment opportunities or looking to align their investment portfolios.

During 2012, by investing in certain regions, the fund made some bold moves, suggesting where they see future opportunity and growth. Conversely, exposure in regions and names in which may be either potentially underperforming or lagging in the near term were reduced. Investors should look at the fund’s actions as yet another tool in their investing tool belt.

The fund has been steadily reducing its assets in Europe as part of a long-term plan to move into both emerging and developed markets in Asia and the Americas, where it sees future strength in the world’s economy. Indeed, during the year, the fund almost halved its exposure to UK and French government bonds, while increasing its to debt from the US, Japan, Germany, South Korea, and Mexico. The fund also more than quadrupled its holding of Australian government debt. For the first time, the funded added bond holdings in local currencies from countries such as China, Russia, Hungary and the Philippines.

As a result, the fund, managed by the country’s central bank, cut its exposure to recession-riddled Europe to 48% of its portfolio down from 53% in 2011. Undoubtedly, the oil fund is not unique in reducing its holdings in the Euro-zone, however, this action may not only suggest a shift in the expected growth rates in the global economy, but it may hint at a expectation that the Euro-zone crisis could linger.

In the equity book, accounting for about 61% of its holdings, among its top investments, it reduced its holdings in Apple by 20%, or around $911.60 million in last three month of 2012. It also cut its stakes in Vodafone, BG Group and ExxonMobil. The fund however boosted its exposure to firms such as HSBC and BlackRock. In addition to Apple and HSBC, the fund’s biggest shareholdings include Nestle, Royal Dutch Shell, and Novartis.

During the year, the fund has made its first real estate investment in the U.S., buying stakes in five office buildings in New York, Washington and Boston for some $600 million. The fund, through its joint venture, aims to acquire additional U.S. office buildings, primarily in those three cities. The Norwegian fund has previously invested in real estate in London and Paris.

The dynamics of the oil fund’s investment book certainly evidences solid preferences, towards emerging markets away from the Euro-zone. Investors should note this. Given the depth of the crisis in the Euro-zone and the ongoing growth potential in the emerging markets, investors could be well served by following this lead. Moreover, the investment in key US property markets speaks to the funds vision of future growth as well.

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