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Norwegian government proposes increasing sovereign wealth fund’s equities to 70%

The Norwegian government has proposed an increase in the strategic benchmark equity allocation of the Government Pension Fund Global to 70% and a decrease in the fund’s expected real rate of return.

The 7.5 trillion Norwegian kroner ($912 billion) Oslo-based sovereign wealth fund currently has an equity allocation of 62.5%. The expected real rate of return should be revised to 3% from 4%, the government will propose in a submission to Norwegian Parliament.

In a notice on its website, the government said the proposed changes will strengthen the fiscal framework for managing Norway’s petroleum revenues in the fund.

Regarding the proposed increase in equities, the government said the expected return on these assets exceeds that of bonds, “thus supporting the aim of increasing the fund’s purchasing power.” It also noted that equities carry higher risks, but said the proposal is based on a “comprehensive assessment of the recommendations received.” The government received advice from a public commission and from Norges Bank, whose money management arm runs the assets of the fund.

The current strategic allocation is 60% equities, 37% fixed-income and 3% real estate, according to the fund’s website.

A prerequisite to any increase is broad political support, and the ability to stick to the chosen strategy in periods of market turbulence, said the notice.

“All in all, the government considers an equity share of 70% to carry acceptable risk. The downward revision of the return estimate underpins the long investment horizon of the fund, a prerequisite for holding a high share of equities,” said Siv Jensen, finance minister, in the notice.

The downward revision of the expected real rate of return is the result of assessments by two separate public commissions in Norway, which expect lower returns going forward for the fund. The 4% rate has been in place since 2001.

The government’s recommendation to increase the equity share of the fund will be presented to Parliament March 31. Further background on the downward revision of the estimated rate of return, along with long-term implications for government finances, will be submitted the same day in a paper.

Spokesmen at Norges Bank Investment Management could not be reached for comment by press time.