OSLO - Norway's Finance Ministry is reviewing whether to further loosen investment restrictions to allow the 609 billion kroner ($84 billion) Government Petroleum Fund to invest in private equity, real estate and emerging market debt.
Officials also are considering allowing the plan to invest further in emerging market equities, though no decision has been made, said Knut Kjaer, executive director at Norges Bank Investment Management, which manages the assets. The scheme is now allowed to invest in only six emerging markets countries: Brazil, Mexico, South Korea, Taiwan, Thailand and Singapore.
Finance Minister Per-Kristian Foss will present the findings to Norway's Parliament as part of the revised national budget in May, said a source at the Ministry of Finance. Mr. Kjaer said he did not know when the review would be released.
Officials at the Finance Ministry declined to provide any further details on the proposed changes ahead of time.
A letter sent to the ministry last year by Svein Gjedrem, Central Bank governor, made a case for private equity, real estate and inflation-linked bonds. "An expansion of the Petroleum Fund's investment universe to include inflation-linked bonds and real estate will probably improve the return of the fund," the letter stated. "Private equity instruments can increase the potential for higher returns through a successful active management strategy."
No hedge fund
While the ministry is likely to review the merits of hedge fund investments, Mr. Kjaer said such a commitment is unlikely.
The review, however, is likely to widen the Petroleum Fund's universe of emerging markets. With the ministry reviewing whether to expand the number of emerging market countries, Mr. Kjaer didn't rule out looking at specialist emerging markets managers, either internally or externally managed. "We haven't decided our next steps here," he said.
In fixed income, which comprises about 60% of the overall fund's assets, the ministry recently allowed the scheme to invest in corporate bonds, represented in the Lehman Global Aggregate index. He did not answer queries on whether the ministry was considering whether to expand allowed investments to high yield or "credit" bond investments.
The Finance Ministry's review of the Petroleum Fund's investment universe comes as the scheme announced it would require even more external money managers to run new sector equity mandates this year.
"We began to move to our sector strategy last year, although we had one investment in 2001. We are going to continue this year; there is definitely more to come," he said.
Active equity searches have been announced for market sectors that include consumer staples, consumer cyclicals and media. It is also considering contenders to manage specialist fixed-income mandates, but deadlines for the searches have closed.
The searches for the new equity specialists, due to be finalized in the next few months, are a continuation of the scheme's strategy of employing specialist active managers to generate alpha in their key areas of expertise. The existing specialist firms invest about 40% of the scheme's equities portfolio, and they comprise more than half of the portfolio's risk, Mr. Kjaer said.
The balance of the equity portfolio is composed of internally run passive and enhanced passive investments.
Passive managers dropped
The firms that previously managed the passive investments - Deutsche Asset Management, Gartmore Investment Management and Barclays Global Investors, all from London - were terminated last year. They ran regional passive equities mandates and were replaced by in-house managers.
"We don't believe in giving general mandates to external managers. We think having specialists means they are not competing so much against each other. Secondly, focused managers increases the possibility that they will exploit their special competence, particularly in sectors where we feel they have an information advantage," Mr. Kjaer said.
Despite the fall in markets that led to a -4.7% return for the year, 2002 was a boom year for the scheme.
With oil prices at near highs, spurred on by supply disruptions in South America and tension in the Persian Gulf, inflows from Norwegian government royalties soared to 124.7 billion kroner.
The money was used to fund new mandates with firms including Wellington Capital Management in sector equities, Lincoln Capital Management, Merrill Lynch Investment Managers and State Street Global Advisors in U.S. mortgage-backed securities; and Citigroup Asset Management in the U.S. health sector. There are 18 different external specialist equity managers currently used by the fund, all appointed in the past two years. The number of manages is expected to increase to 25 this year.
Further changes to the investments might occur when a government-appointed commission investigating whether the scheme should screen for ethical investments delivers its report to Parliament in June.
A separate report by the Ministry of Finance is investigating whether the Petroleum Fund's investments break international conventions signed by Norway, including the U.N. Convention on the Rights of the Child; the U.N. Convention on Land Mines; and International Labor Organisation conventions. Mr. Foss will receive that confidential report at the end of March, the source said.