Biggest wealth fund recommends raising stock holdings to 62.5%

OSLO (BLOOMBERG) - Norway's US$890 billion (S$1.23 trillion) sovereign wealth fund recommended raising its proportion of stocks to 62.5 per cent of its total holdings to keep the same risk levels as it prepares to separate out real estate from its main fund.

The fund assumes a market risk of 0.5 on its unlisted real estate, meaning that the return on these assets moves in the same direction, but not as much, as the broad equity market, it said in a letter to Finance Ministry.

If the market risk is "to be kept largely unchanged relative to the current mandate, and we assume a market risk of around 0.5, this indicates that the equity allocation in the benchmark index should be increased by around 2.5 percentage points," NBIM Chief Executive Officer Yngve Slyngstad and Norges Bank Governor Oeystein Olsen said in the letter.

The letter comes as the government is set to receive a recommendation next week from an independent group on the proportion of shares the fund should hold. It's currently mandated to hold 60 per cent in stocks, 35 per cent in bonds and 5 per cent in real estate.

The fund also recommended creating new intervals in the mandate, set for 50-70 per cent for stocks, 30-50 per cent for bonds and zero to 7 per cent for real estate. It also wants to set the limit for investments in high-yield bonds relative to the whole fund rather than as a share of the bond portfolio. That limit would then fall to 2 per cent from 5 per cent.

The fund said going forward, purchases and sales of real estate will be funded by sales and purchases of both equities and bonds, rather than just bonds previously. The securities sold will vary with the type of property to eliminate currency risk and limit market risk.

For example, buying a property in the UK might be funded through the sale of a combination of UK equities and bonds. The fund also recommended introducing an MSCI's risk model to estimate the expected tracking error of the fund's unlisted real estate investments.