Close
Lessons From the Norwegian Sovereign Wealth Fund #investment #FIRE

Lessons From the Norwegian Sovereign Wealth Fund

Norway’s wealth fund gained $84 billion in the first quarter. According to the quarterly report, the Government Pension Fund Global returned 9.1 percent, or 738 billion kroner, in the first quarter of 2019. Strongest ever (in terms of kroner).

This fund invests only outside Norway, to prevent the domestic economy to overheat.

Returns by asset class in the first quarter of 2019:

  • Stocks: 12.2%
  • Bonds: 2.9%
  • Unlisted Real Estate: 1.7%

The fund managed to beat the index by 0.2%, which is outstanding taking into consideration that it has over $1 trillion in assets under management.

One of the key objectives of this fund is to achieve 3 percent real return. This year is off to a good start in order to arrive that value.

History of the Fund

In 1969 Norway discovered oil in the North Sea, and in 1990 the Parliament signs the Government Pension Fund Act. The idea was to invest the surplus revenues of the Norwegian petroleum sector. Therefore leading to the
Government Pension Fund Global creation. Also known as the “Oil Fund“.

Historical Returns and Value

Since 1998 the fund has generated an annual return of 5.8 percent. (Return in 2019). At the beginning of the fund, money was all invested in bonds. From 1998 there were changes and 40% was invested in stocks. Thus diversifying the investments across different assets class.

In terms of global value, in 2017 the fund reached the astonishing number of 1 trillion dollars.

Source

Lesson About Diversification and Capital Allocation

One of the first changes made in the portfolio of the fund was to diversify into stocks. Which I believe is something that people will find contra-intuitive in public/sovereign funds. They want safety above all.

As they are typically averse to risk, they may feel more comfortable 100% in bonds. Diversification is probably the only free lunch in investing precisely because you can have an overall less risky portfolio by adding a more riskier asset: stocks.

By the end of 1st quarter 2019, the breakdown of the asset diversification is:

Stocks: 69.2% (equities, which are ownership interests in companies)

Bonds: 28% (a type of loan to governments)

Unlisted Real Estate Investments: 2.8%

By all standards this is an agressive portfolio with a strong inclination towards stocks. Almost 70% is a long way from the 40% in 1998.

We know that past returns do not guarantee future results, but stocks historically have delivered a superior return when compared with bonds or plain simple cash. Therefore if I’m focused on the long-term, maybe a superior deployment of capital towards a diversified portfolio of stocks is the way to go.

Lesson About Diversification Across Regions

This fund has now stocks in 9158 companies from around the world. Therefore capturing global stock, bond and real estate value creation while diversifying risk.

Just to give you an idea, the number of countries where the fund is invested is 73. Multiple countries, regions, currencies and different companies in terms of size.

Source

As you can see in the image, not only Norway doesn’t invest in its own country, it tries to diversify as much as possible. US, UK, Europe, Japan, and so on. The list is huge. The Oslo-based fund holds on average 1.4 percent of global stocks.

The largest stock holdings at the end of the quarter were Apple Inc. and Microsoft Corp. Its largest bond holdings were in U.S. Treasuries, followed by Japanese and German government debt.

Lesson on Why This Fund is Special

When I first read about this fund – in essence profits from oil turned into savings and then investments – I though “well this is the reasonable and logic thing to do”. But we know that other countries with the same conditions as Norway: valuable commodities that could be easily extracted and sold, do not end up with this huge amount of money. Why?

Wikipedia has even a name for this outcome. Resource Curse. We all know of examples, such as Venezuela, that has huge amounts of oil, and not only didn’t manage to save and invest – it’s now in worse economic and social conditions than other countries in South America.

I believe that having a population of +5 million people like Norway, and +20 years of saving and investing hundreds of million of dollars instead of spending all now is really an example that makes this fund special.

Future generations should be forever thankful and grateful for this decision. This is truly an excellent example for other countries (and individual investors) on how to save money from the valuable things that we have now, so future generations can have more stability.

I wish my country, Portugal, would do the same with the money from tourism or our top quality wine. Really Norway, how do you do it? How do you find consensus among different political parties?

Another Question: Why Would a Norwegian Want to FIRE?

With this type of investment in the future, I really want to understand why Norwegians want to be financially independent or to retire early. Why would you make that decision? What motivates you, knowing that the Wealth Fund will probably guarantee your future and the future of your children?

Norwegians FIRE and FI bloggers, please give your contribution. Thank you!

Lessons From the Norwegian Sovereign Wealth Fund #investment #FIRE #FI #Money
Pin it here

Do not save what is left after spending; instead spend what is left after saving.

― Warren Buffett

About GTRetire

GTRetire is the founder of GrowtoRetire, a blog about financial independence and early retirement. Click here to learn more about starting a blog! Also, this post may contain affiliate links, please read the disclaimer for more info.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.