Government Pension Fund-Global, Oslo, returned 12.7% on its investments in the quarter ended June 30 on the strength of its equity allocation.
Total assets grew to 2.385 trillion Norwegian kroner ($394 billion), up 14.9%; 270 billion kroner came from investment returns and 40 billion kroner was the result of inflows, according to the fund's second-quarter report released Aug. 14. Currency movements subtracted 1 billion kroner.
The fund's investments outperforming its custom benchmark by 2.1 percentage points.
The equity portfolio, which returned 19.5% vs. 5.1% for fixed income, increased to 60.3% of total assets in the second quarter, up from 52.6% as of March 31. The allocation increase came from a decision in June 2007 to raise the equity target to 60% from 40%.
The equity increase incurred transition costs of 8.7 billion kroner and was completed in two phases. The first, which ended Dec. 31, funneled new inflows into equities and reinvested redeemed bonds and coupons in stocks. Then, 177 billion kroner was reallocated to equities from bonds in the first half of 2009.
The timing of the move to equities helped boost returns, according to the fund, as stock purchases were made at a 22% discount and bonds sold at an 11% premium to their June 2007 levels.
Future inflows will be used to rebalance the fund. Inflows to the fund have fallen drastically because of lower oil prices; inflows were 84 billion kroner in the six months ended June 30 vs. 205 billion kroner in the second half of Dec. 31.
The boost from equity returns helped offset decreased inflows, which fell significantly in the first half of 2009 because of lower oil prices. The fund's inflows come from proceeds from Norway's sale of oil reserves.
Externally managed fixed income fell by 26 billion kroner, while externally managed equity funds increased by 54 billion kroner. Overall, external management increased to 16% of total assets in the second quarter from 13% as of Dec. 31.
In an e-mail response to questions, fund spokesman Vidar Korsberg Dalsbø declined to provide further information on external management.
Separately, fund officials added water management to its list of governance, social and environmental activist areas.
“Economic growth, industrialization and population growth are driving rising demand for water, while factors such as climate change, pollution and regulation are increasingly affecting the supply of water,” according to the report. “For investors like NBIM, which is broadly invested in sectors with high water-related risk, companies' water-risk management may be critical.”
Fund officials identified seven sectors as being particularly exposed to water-related risk: food, agriculture, pulp and paper, pharmaceutical, mining, manufacturing and power, and water supply. They will outline expectations of companies' water management practices in the third quarter.
