Norway SWF Champions Southern European Bonds

(February 21, 2011) — The chief executive of the world’s second-largest sovereign wealth fund believes yields on southern European countries’ bonds became more attractive last year and will continue to improve, the Wall Street Journal reported.

According to Yngve Slyngstad, the chief executive of Norway’s $513 billion Pension Fund Global, the sovereign wealth fund sold about 50% of its government bond investments in southern Europe in 2009 and then repurchased parts of that the following year. Slyngstad told the WSJ that the buying signals that while yields look attractive despite the risks, the sovereign-debt crisis hasn’t ended. “With all the gyrations in the bond market, it does not feel like the situation has passed,” he said.

In the third quarter, the sovereign wealth fund reported a return of 7.2%, or roughly $35 billion, fueled by gains in global stock and bond markets. The fund has large influence in Europe with 60% of its fixed-income investments and 50% of its equity investments in the continent.

Recent research prepared by State Street Global Advisors (SSgA) showed the financial crisis drove the world’s leading sovereign wealth funds to reexamine their investment strategies and make a number of significant changes. Since 2008, Norway’s fund, similar to other sovereign wealth funds around the world, adjusted its investing strategies. To cope with the financial downturn, the Pension Fund Global increased its exposure to equities and decreased its exposure to bonds.

“Official sector asset managers – central banks, governments and sovereign wealth funds – have not been immune to the difficult market conditions,” John Nugée, senior managing director of SSgA’s Official Institutions Group, said in a statement. “Many have re-examined the performance of their funds, lessons they should draw from the market turmoil and the extra defenses they need in their approach. In many cases the review confirmed that their guiding principles were correct, but a number have decided to make some important changes.”

Similarly to SSgA, the International Monetary Fund (IMF) recently published a report on the investment practices of sovereign wealth funds following the financial crisis. Urging a review of investment objectives, the IMF noted that during the economic downturn, some of these pools of capital changed their asset allocations in ways that may not have been ideal or justified. In a report posted on the firm’s website, the organization said that sovereign wealth funds have a strong capacity to stabilize international capital markets due to their enormous size and long-term investing approach. The report asserted that in response to the global crisis, funds reacted by increasing liquidity, taking on additional risk, or adding new roles to their traditional mandates.

The IMF’s research also explained that the crisis impacted sovereign wealth funds’ asset allocations in varied ways. While Norway and the Australian Government Future Fund increased their equity investments, the Alaska Permanent Fund and Ireland’s National Pension Reserve Fund increased their share of cash holdings. Some funds, such as Singapore’s Temasek Holdings, shifted their investments geographically.