July 8, 2024

There will be wealth

Dear Reader,

Resources have long been a key factor in determining a nation's wealth.

Timber, coal, precious metals, natural gas, rare earths, and, of course, oil.

On August 21, 1969, Ocean Viking found oil in Norway's sector of the North Sea. By the end of that year, it was clear the Norwegians were sitting on massive oil and gas reserves.

About a decade later, the first Norwegian oil field, Ekofisk, was, was producing 427,442 barrels of crude oil a year.

Today, Norway is one of the world's leading exporters of both oil and natural gas. The country makes between US$50 billion and $100 billion a year from these resources.

But, this is just the start of Norway's modern wealth saga.

Norway established the Statens pensjonsfond, or Government Pension Fund, in 1990. The fund contains two distinct entities: the Global fund (GPFG) and the Norway fund (GPFN).

The Global fund, known as the Oil Fund, is the world's largest sovereign wealth fund at more than $1.6 trillion in assets. It invests the surplus revenues Norway generates from its resource exports.

Why: To provide a financial buffer against volatile oil prices and secure the nation's wealth long after its oil reserves have been depleted.

How: Through robust ethical, socially responsible and sustainable investments in stocks, bonds and real estate all over the world.

As for what, exactly, the Oil Fund invests in?

A piece of (almost) everything

Norway is on a mission to convert its (finite) oil wealth into long-term, multi-generational wealth for its citizens.

To give you a sense of just how much invested wealth they're managing, Norway could liquidate the Oil Fund and give each of its 5.5 million citizens almost $300,000 in cash.

From that relatively modest Oslo building in the photo above, the GPFG deploys its $1.6 trillion (and growing) portfolio across pretty much the whole world (with some exceptions, which I'll explain shortly).

Here’s a breakdown of its main investment categories:

Stocks

Allocation: Around 70% of the fund.

Geographical spread: Investments are made globally across developed and emerging markets.

Sectors: The fund invests in a broad range of industries, including technology, finance, healthcare, consumer goods, and more.

Examples: Major holdings include shares in large multinational companies like Apple, Microsoft, Nestlé, and Alphabet.

Fixed Income

Allocation: Approximately 25% of the fund.

Types: Investments include government bonds, corporate bonds, and inflation-linked bonds.

Geographical spread: Fixed income investments are also globally diversified, with significant holdings in U.S. Treasuries, European government bonds, and bonds from other stable economies.

Real Estate

Allocation: Around 2-3% of the fund.

Types: Investments in commercial real estate, including office buildings, retail spaces, and logistics properties.

Geographical spread: Key markets include major cities in the United States, Europe, and Asia.

Examples: Properties in cities like New York, London, and Tokyo.

Renewable Energy Infrastructure

Allocation: A relatively new and growing segment, though still a small portion of the overall fund.

Types: Investments in renewable energy projects such as wind farms and solar power plants.

Geographical spread: Global investments with a focus on regions with strong renewable energy potential.

The GPFG’s allocation is all about maximizing returns while — and you won't believe this — maintaining manageable risk levels.

According to Norges Bank (my emphasis added):
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With 2.33 percent of European stocks in its portfolio, the Oil Fund is the largest stock owner in Europe. It participates in thousands of shareholder meetings and proposals every year.

Building wealth by beating benchmarks

The chart below shows you how the Oil Fund's value has grown over the past three decades.

$23 billion to $1.6 trillion in 26 years

So that's the value, but what about the performance?

Since its inception in 1996, the GPFG has averaged annual return of about 6%.

Given the fund’s conservative investment strategy aimed at long-term stability and growth, this is a solid, albeit not spectacular, return.

The fund’s returns can vary significantly from year to year due to market fluctuations.

For example, in 2021, the GPFG achieved a return of 14.5%, driven by strong equity markets. However, in years of economic downturn or market stress, returns can be negative, such as during the 2008 financial crisis.

Last year, the Oil Fund logged a mega 16.1% return and $213 billion in profit.

Generally, the fund aims to outperform its benchmark indices. The returns are compared against a custom benchmark based on global equity and bond indices. Historically, the fund has often managed to exceed these benchmarks, adding value through active management and strategic asset allocation.

But it's not just the fund's size or returns that make it remarkable.

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The Oil Fund also seeks to build wealth for Norway by investing only in ethical, socially responsible and sustainable assets.

The fund's ethical guidelines mean it cannot invest money in companies that directly or indirectly contribute to killing, torture, deprivation of freedom or other violations of human rights in conflict situations or wars.

Here's a small sample of investments excluded by the Oil Fund, and the reasons for doing so:

You won't find companies that produce tobacco, manufacture nuclear arms, or contribute to severe environmental damage or humans rights abuses in the fund's holding list.

So that's a quick primer for you on the largest sovereign wealth fund on the planet.

The Norwegian Ministry of Finance forecast that a worst-case scenario for the fund value in 2030 was $455 billion.

Best case? $3.3 trillion.

Oh, and one more thing.

The Oil Fund is perhaps the most transparent such organization in the world — you can tune into In Good Company, their podcast, in which Norges Bank CEO Nicolai Tengen interviews CEOs of the companies the fund has invested in.

Quote of the week

— Norges Bank Investment Management

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Thom
Editor, The Benchmark
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