Norway Oil Fund Has Worst Quarterly Drop on Stocks

By Vibeke Laroi and Marianne Stigset

Nov. 25 (Bloomberg) -- Norway’s sovereign wealth fund, the world’s second largest, suffered its biggest quarterly decline as the worst financial crisis since the Great Depression battered global stock markets.

The Government Pension Fund - Global’s investments fell 7.7 percent in the third quarter as measured by a weighted basket of currencies, Norway’s central bank said today. The fund lost 13.1 percent on stocks and 1.2 percent on bonds, resulting in the biggest quarterly decline since its inception in 1996.

The fund’s “robust long-term strategy makes me sure that its investment will over time generate a good return within an acceptable level of risk,” Finance Minister Kristin Halvorsen said today in a statement. The government also pumped a record 128 billion kroner ($18.2 billion) into the fund in the quarter.

Global stock markets plunged in the period as economic growth stalled globally. The MSCI World Index fell 16 percent in the quarter and Europe’s Dow Jones Stoxx 600 Index slumped 12 percent. Halvorsen on Nov. 10 said 2008 will be a “year of losses” for the fund, built on Norway’s oil and gas revenue. The country is the fifth-largest oil exporter and the third- largest gas exporter.

Challenging

The fourth quarter will also be “challenging,” Norges Bank Investment Management Chief Executive Officer Yngve Slyngstad said at a press conference in Oslo today. There’s “something close to a crisis in confidence in the financial sector: it’s a liquidity crisis, it’s a banking crisis and gradually a crisis in the real economy.”

The fund, worth 2.12 trillion kroner at the end of the quarter, invests oil money abroad to avoid stoking domestic inflation. The fund lost 1.8 percentage point more than a benchmark set by the Finance Ministry. Norway’s central bank runs the fund, while the Finance Ministry sets guidelines.

The fund is shifting from bonds to stocks and other investments to get higher returns. The fund is moving to 60 percent of its assets in equities, up from 40 percent, and seeks to have 35 percent in bonds, rather than 60 percent. It had 53 percent of its holding in stocks at the end of the quarter.

HSBC

HSBC Holdings Plc, Europe’s biggest bank, was its largest stock holding at the end of quarter, worth 14 billion kroner. German government bonds were the biggest bond holding, at 108 billion kroner.

The fund holds 1.25 percent of all European equities, up from 0.77 percent at the beginning of the year, Slyngstad said, making it the largest equity investor in Europe.

“There is a tendency in our strategy to buy where the equities markets relatively speaking are weaker, so we do buy somewhat more in Europe than in other markets, but we are significant buyers in the U.S. and Asia,” he said.

Oil hit a record $147.27 a barrel at the beginning of the third quarter, driving the purchasing power of a barrel of oil relative to the market value of the global equity market. Crude has plunged more than 60 percent since July, to $52.22 a barrel.

“The purchasing power of a barrel of oil relative to equities remains very favorable,” Slyngstad said, with the value of equities slipping.

Considerable Losses

The fund participated in the recapitalization of six financial institutions this year, including Lehman Brothers Holdings Inc. The largest investment was of 1.4 billion kroner, he said, without specifying the institution. “None of those investments were good and three of them have incurred us considerable losses.”

Financial institutions around the world have raised about $400 billion in new capital, excluding rights offers and government help, of which the fund contributed about $1 billion.

“We do not have a strong need to participate any more in these,” Slyngstad said. “Because we are a large investor, one of the biggest, and these recapitalizations happen in a way that they try to get a few, large investors on board, we receive requests to participate in almost all instances and we’ve said no to a lot in the last two months.”

The Norwegian fund will also begin investing in real estate next year and is adding emerging markets such as Russia, India, China and Egypt to its investments.

“We’re in no rush to enter the real estate market,” Slyngstad said. “Prices changing on a weekly basis in our favor.”

The fund has also loosened its policy on stakes in individual companies, allowing a holding as large as 10 percent in single companies, up from 5 percent. At the end of the third quarter, the fund’s largest ownership interest in an individual company was close to 6 percent.

The Abu Dhabi Investment Authority is world’s the largest sovereign wealth fund.

To contact the reporters on this story: Vibeke Laroi in Oslo at vlaroi@bloomberg.net; Marianne Stigset in Oslo at mstigset@bloomberg.net