Article / 28 February 2017 at 13:00 GMT

Norway's oil fund reports €50 billion or 6.9% return in 2016

  • Equities did best in the Norwegian oil fund's portfolio in 2016
  • Net return, after outtake and forex adjustment, was only NOK35 billion
  • Next month parliament is expected to vote to increase the equity share to 70%
  • Expected long-term returns will be lowered to 3% per year
  • Politicians have financed large parts of the budget with revenues from the fund
Norwegian oil
Oil and gas resources brought Norway considerable wealth, which is partly 
invested abroad. Photo: Shutterstock

By Clemens Bomsdorf

The Norwegian oil fund did much better last year than it expects to going forward. While the overall return was NOK447 billion (€50 billion) or 6.9%, it has recently lowered its long-term expectations to less than half of that – 3% annually. (Read our earlier coverage here for details and how you could learn from that shift.) 

Annual return

Source: NBIM

“The Executive Board is satisfied that the return both in 2016 and over a longer period  has been good. The Board is also satisfied that management costs have been kept at low levels despite the gradual expansion of investments into new markets,” says Øystein Olsen, Chairman of the Executive Board of Norges Bank in a statement.

Equity investments, which make the bulk of its portfolio, performed best with an annual return of 8.7% (mainly coming from US stocks) while it still made 4.3% with fixed income, but only 0.8% with real estate.

At the end of last year 62.5% of its assets were invested in equities while 34.3% were in fixed income and 3.2% in real estate. In order to avoid strengthening the Norwegian kroner and to stave off Dutch disease, the money is solely invested overseas.

Recently the government has heavily tapped into the fund. In 2016 it took out NOK101 billion (€11.4 bn), which for the first time was more than the money invested in the fund (see chart). This is why the fund in absolute numbers, and when exchange rate changes are taken into consideration, increased by only NOK35 billion.

Inflow Outflow
Source: NBIM 
 
Additionally, the government’s demand for money has led to new rules being proposed by the Norwegian central bank, adopted with changes by the government and to be presented to parliament next month.

In a submission to the Ministry of Finance, Norges Bank had wished to increase the equity share in the portfolio to 75% (from current target levels of 60% and 62.5% de facto) and suggested a decrease in the expected annual real rate of return to 3% from 4%.

The government announced it will increase the share of equity by slightly less, to 70%, and lower the expected annual real rate of return to 3%.You can see the full details on the government's website.

Established in the mid-1990s – the first investment in the fund was made in May 1996 – the fund takes care of Norway’s long-term wealth by investing the national oil and gas business’s profits in global financial markets. As of February 28, it had a volume of more than NOK7.6 trillion, roughly EUR160,000 per head. It is managed by the Norwegian central bank's investment unit, NBIM, which makes the daily investment decisions.

We've previously written here, here and here about how you as a private investor can take the fund as your blueprint. You might also want to read fund's annual report for 2016 to see exactly where the money was invested (this article includes charts from the same document). The fund's three largest single equity holdings were Nestlé, Royal Dutch Shell and Apple. 

Norw oil fund table

































Source: NBIM
 
— Edited by Jack Davies

Clemens Bomsdorf is a consultant editor at Trading Floor.

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