Norway’s Government Pension Fund Global, Oslo, should increase its equity allocation 15 percentage points at the expense of bonds, Norges Bank recommended.
Norges Bank, which oversees the investments of Norway’s sovereign wealth fund with 7.5 trillion Norwegian kroner ($872 billion) in assets, was requested by the Ministry of Finance in February to evaluate the risk-return profile of the fund’s existing allocation.
Egil Matsen, deputy governor of Norges Bank, announced Thursday the bank’s recommendation to increase the equity allocation in the fund’s strategic benchmark index to 75% from 60% for a 10- to 15-year investment horizon. The target allocation to bonds would drop to 20% from 35% as part of the recommendation. Real estate makes up the remaining 5%. Any changes would need approval from the Ministry of Finance.
Norges Bank argued the expected average annual real return on a portfolio with equity allocation of 75% over 10 years will yield 2.5% and 3.5% over 30 years, with lower expected volatility.
By comparison, a portfolio consisting of 40% bonds and 60% equities has return estimates of 2.1% over 10 years and 2.6% over 30 years.