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Sovereign Wealth Funds

At $1 trillion, largest sovereign wealth fund loses taste for new asset classes

The world's biggest sovereign fund says expanding into new asset classes is now hardly worth the effort.

That means the opportunities for raising returns that Norway's wealth fund once saw in infrastructure and private equity (and spent years trying to get political approval to buy) no longer exist, according to CEO Yngve Slyngstad.

"Today we're close to $1 trillion. Realistically speaking, whether we should invest in infrastructure, private equity or the likes isn't a very important question for the fund," Mr. Slyngstad said in an Aug. 29 interview at his office in Oslo. "It would be such a small proportion, and the duration of implementation would be so long, that if it were to have an impact on returns, it would in reality be if the fund was going down in size."

The comments offer a surprising twist to a process in which Norwegian governments have explored the merits of letting the wealth fund expand beyond stocks, bonds and real estate. The investor had argued that adding more asset classes offered a path to higher returns after years of record-low interest rates. But now, its sheer size has undermined the logic of that proposition, according to Mr. Slyngstad.

Even after getting the green light to move into real estate in 2010, the fund has struggled to reach the 5% target it was given, despite adding staff to oversee the process.

"Even in real estate, which is a very big asset class, you need to spend many years building a significant proportion," Mr. Slyngstad said. "It would be similar for infrastructure and private equity."

Meanwhile, several think tanks and non-governmental groups have been urging the fund to start investing in infrastructure. The Norwegian government has so far said no, on the grounds that infrastructure investing risks pushing the fund into politically sensitive territory, with many projects being public works.

In a report presented to Norwegian lawmakers earlier this year, the Institute for Energy Economics and Financial analysis argued the fund should be freed to invest 5% of its capital in unlisted infrastructure, and especially renewable-energy assets.

"Unlisted infrastructure offers attractive returns for the risk incurred in a growing market," Tom Sanzillo, the author of the report, said in emailed comments on Thursday. "Increasing equity investments adds risk with only modest results for global returns."

Mr. Slyngstad says the fund wouldn't say no to infrastructure if the government were to change its mind, but the asset class is now unlikely to have a meaningful effect on returns. The appeal of infrastructure has also declined as the fund instead won permission to boost stock holdings to 70% from 60%.

"For future generations to receive their share of the oil age that we had, our investments in listed securities will be the primary driver for returns and therefore also for the fund's income," Mr. Slyngstad said. "This fund is driven increasingly by returns in the equity market, not so much what happens with interest rates, unless they affect the stock market."