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Norway's central bank recommends more equities in sovereign wealth fund

Xinhua, December 2, 2016 Adjust font size:

Norway's central bank said Thursday it has recommended increasing the proportion of the sovereign wealth fund's investments in equities to 75 percent from 60 percent.

"The Executive Board of Norges Bank advises the Ministry of Finance to increase the equity share in the fund's strategic benchmark index to 75 percent," the bank said in a statement.

"The expected average annual real return on a portfolio with 40 percent bonds and 60 percent equities is estimated at 2.1 percent over 10 years and 2.6 percent over 30 years," the bank said.

"If the equity allocation is increased to 75 percent, the expected average annual real return over 10 years increases to 2.5 percent and to 3.5 percent over 30 years," it said.

Norges Bank was requested in February to assess whether the relationship between expected return and risk for equities and bonds respectively had changed since the equity share was evaluated and changed in 2006, and whether there are conditions that warrant a change in equity share in the fund's strategic benchmark index.

"The expected volatility of a portfolio comprising 75 percent equities and 25 percent bonds is currently lower than it was reasonable to assume in 2006. The expected excess return of equities over bonds currently appears to be somewhat higher, and the fund now accounts for a much larger proportion of total petroleum wealth," the bank said.

"As is the case today, there will be considerable volatility in the value of the fund. A high equity share presupposes that the investment strategy can be maintained," it added.

The fund had a market value of 7,118 billion kroner (844 billion U.S. dollars) at the end of the third quarter and was invested 60.6 percent in equities, 36.6 percent in fixed income and 3.1 percent in real estate. Endit