Why you should follow the Norwegians east

On Friday, I said that your government is possibly the worst investor in the world. Now, far be it for me to say that my home team is much better…

…but it looks like my home team is doing much better!

Yes, Norway is very different to the UK. With access to the world’s most amazing natural resources, they’ve built up a sovereign wealth fund worth some $120,000 per man, woman and child. They call their fund ‘The Petroleum Fund’. OK, it’s a pretty uninspiring name, but at least it’s honest.

And as it happens, the managers of the petroleum fund are on the same wavelength as us here at The Right Side. On Friday, they published details of what they’ve been up to recently. And it makes for some very interesting reading.

Out with the old

At some $600bn, Norway now has the second largest sovereign wealth fund in the world. And unlike in the UK, this massive oil wealth isn’t left for the government to spend (squander). Instead, it’s rolled up into the petroleum fund, which is then managed by Norges Bank.

This fund grows bigger and more important every day – especially when oil is trading at today’s prices. But even more importantly, the fund has had an excellent record on its investments.

As it happens, Norway is currently Europe’s biggest equity investor. But here’s the thing: it plans to sharply reduce its exposure to Europe.

The Norwegians, it turns out, had their fingers burnt on Greek debt. Maybe they had been a little naive. They believed the Europeans when they said “no defaults”. They convinced themselves that the European man’s word was his bond. More fool them!

So maybe now it’s a case of once bitten, twice shy. Their strategy suggests wariness over European bonds. The European fixed-income portfolio is to be cut from 60% to 40%.

Interestingly it’s not just Europe’s bonds that worry them. Exposure to European equities will be cut from 47% to 38%. 

Of course, this will be a gradual rebalancing. These sorts of positions take a while to unwind. But it’s still a sizeable chunk.

…and in with the new

And what are they doing instead? Well, mostly they’re reinvesting in emerging markets and Asia-Pacific. That’s what I took away after reading the fund managers’ strategy documents published on Friday.

How exactly are they doing that?

Well, although it was set up over twenty years ago, it wasn’t until recently that the fund went into equities. It was originally set up as a bond fund. And that’s turned out to have been an inspired move. Perhaps it’s been as much to do with luck as judgement, but the fact of the matter is that barring the odd Greek hiccup, sovereign bonds have been a fantastic asset class. They’ve offered safe and steady returns.

Norges Bank is looking to repeat the same trick in emerging markets.

According to Friday’s report, “Norges Bank recommends the expansion of the strategic benchmark index for bond investments to include emerging market currencies…”

And that’s not all. It’s also going to raise the stakes in developed Asia-Pacific’s bonds too. It’s going to expand exposure from the current 5% to 11%.

This is a currency issue. The Norwegians can see as well as anyone else the dangers presented by money printing. Though they didn’t say, I suspect they’re looking towards strongly managed economies like Singapore, Malaysia and Hong Kong to balance their exposure to dollar, euro and yen debt. They see better returns with reduced volatility on the other side of the globe. And I’d have to agree with them.

Why you need to go east

I always like to read fund managers’ reviews and try to pick out their strategies. Especially managers that are worth watching. As in this case, you can usually get all the information you need free online at the fund manager’s website.

To my mind, the Norwegian petroleum fund stands out. Unlike most investment funds, the investment term is indefinite – the money’s there to create an income in case the oil price gets hammered, or they run out of the stuff.  I also like the long-term perspective – and I find it interesting to see how they see the game playing out.

To my mind these guys are asking the right questions. And they probably arrive at the right answers more often than not. For the moment, that means winding down your exposure to the old haggard economies of the West and looking East.

As always, we don’t play this hand ‘all-in’ – and bear in mind this is a long-term view. In the short run, anything can happen.

But if you haven’t got exposure to emerging markets, then it may be time to start building some positions.

If you want to know why 20% of my equity allocation is in emerging markets, then you can read all about it here. I mention a couple of investment trusts that could be of interest too.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Managing Editor: Frank Hemsley. The Right Side is a regulated product issued by Fleet Street Publications Ltd.

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