Norway's SWF Posts a 5.4% Loss in Q2

ai5000 reports, Norway's SWF Posts Q2 Loss Due to European Debt Crisis, BP Spill:

Norway's fund dropped $25 billion in the second quarter, pummeled by the European debt crisis and BP's downturn after the Gulf of Mexico spill.

The Government Pension Fund Global, Norway’s sovereign wealth fund commonly known as the "oil fund", lost 155 billion kroner ($25 billion) or 5.4% in the second quarter, representing the first drop since the start of 2009.

The single worst-performing investment for the world’s second largest SWF: oil producer BP. The company’s oil spill in the Gulf of Mexico in April, the largest spill in US history, slashed BP’s share price in half during the period. Following the oil disaster, the fund said oil majors have the potential to improve environmental safety standards, indicating that it was seeking a greater effort by the oil industry. "This is an industry-wide issue and the industry needs the larger players with the best resources (to achieve this)," said Yngve Slyngstad, chief executive officer of Norges Bank Investment Management (NBIM), which manages the fund, in a Reuters interview.

“The spill put the spotlight on safety standards in the oil industry,” says Slyngstad. “NBIM supports the board of BP’s commitment to ensure that safe and reliable operations top the company’s set of priorities. We also seek a wider industry effort that should be led by the largest companies to improve safety and environmental standards.”

Additionally, Norges Bank said Friday that the fund’s equity investments returned -9.2%, while fixed-income investments returned 1%. The fund’s investments consisted of 59.6% equities and 40.4% fixed-income securities at the end of the quarter.

Despite the loss, the fund grew year-on-year to 2.8 trillion kroner ($455 billion), from 2.4 trillion kroner, central bank data showed.

Emma Rowley of the Telegraph reports, Norway takes £860m hit over BP oil spill:

Government Pension Fund Global , which funnels tax revenue frosm the country's oil and gas into foreign investments, said the crisis-hit company was its single worst-performing investment.

The BP shareholding fell from 18.9bn kroner (£1.96bn) to 10.6bn kroner, representing a drop of around £860m.

"We've had more than 1pc of our stock holdings invested in BP and this share halved in value," said Yngve Slyngstad, head of Norges Bank Investment Management (NBIM), which oversees the fund.

The loss reignited fears for the impact of BP's troubles on UK pension funds, which typically have 1.5pc of their assets in the oil giant, according to the FairPensions charity.

Norway's fund also saw worries over high sovereign debts and another economic slowdown send other stocks falling across Europe, where it has around half its equities.

Nonetheless Mr Slyngstad said the fund had increased its exposure to Europe during the period.

"So our assessment of the situation has become more positive during the second quarter," he said.

Overall, the fund's 5.4pc decline in investments represented a 155bn kroner loss.

Around 60pc of the fund's investments were in shares and the rest in debt, a slight change from the previous three months, when shares made up more than 62pc.

Equities ended down 9.2pc, while fixed-income investments returned 1pc.

However the weak Norwegian currency and a fresh influx of capital from the government helped the fund's value rise 29bn kroner to 2,792bn kroner in the three months to the end of June.

The wealth fund, the world's second largest after the United Arab Emirates, only invests abroad to avoid overheating its economy and to shield it from oil price changes.

In the wake of April's spill into the Gulf of Mexico, Mr Slyngstad called for an "industry effort" led by the biggest companies to improve safety and environmental standards.

"It is only the oil majors that can take on the task of focusing and developing further the environmental safety standards," he told Reuters.

"This is an industry-wide issue and the industry needs the larger players with the best resources (to achieve this)."

Separately, he said energy-intensive companies were doing too little to combat climate change, with chemicals and transport firms bottom of a new survey by the fund.

You can learn more on NBIM by going to their website, read about their investment mandate and read the entire Q2 report by clicking here. I quote the following from page 11:

Volatility in equity and fixed-income markets increased in the second quarter because of uncertainty about European government debt, funding challenges for banks and fears of an economic slowdown, particularly in Europe. The VIX index, which measures expected volatility in the U.S. stock market, doubled during the quarter to levels seen at the end of the financial crisis in spring 2009. The iTraxx Europe index, which measures risk in the European bond market, rose by 50 basis points to 129 basis points.

Expected absolute volatility, measured by the statistical concept standard deviation, uses historical price movements in the fund’s investments to estimate how much the fund’s annual return can be expected to vary in normal periods. At the end of the second quarter, the fund’s return was expected to vary 9 percent, or 250 billion kroner, per year. That compares with 7.2 percent at the start of the quarter.

The Ministry of Finance has set limits for how much NBIM may deviate from the benchmark portfolio in its fund management.

The most important limit is expressed as expected tracking error (relative volatility) and puts a ceiling on how much the return on the fund can be expected to deviate from the return on the benchmark portfolio. Expected tracking error must not exceed 1.5 percentage points (150 basis points). The actual figure was 0.38 percentage point at the end of the second quarter, up from 0.32 percentage point at the start of the quarter. The increase was mainly due to higher risk associated with government debt and covered bonds.

In addition to limiting risk in the fund, the Ministry of Finance has set other guidelines for the fund’s management. There was one minor breach of these guidelines in the second quarter.

Given the volatility in Q2, it's pretty amazing that there was only one minor breach of guidelines. Keep an eye on Norway's sovereign wealth fund (SWF) as it represents an increasingly important source of global liquidity. In fact, large sovereign wealth funds are providing lots of liquidity to global markets which many analysts tend to ignore, much to their detriment.