Oil is not a hindrance: what now earn sovereign funds

Despite oil prices

By the end of 2015 the yields on Government pension Fund of Norway, the largest national wealth Fund in the world, amounted to only 2.7%, or 334 billion Norwegian crowns ($39.1 bn), follows from its reporting. A year earlier, the yield of the Fund amounted to 7.6%. Indicators by the end of 2015 the most modest over the past four years.

In particular, investments in equity brought sovereign Fund 3.8 per cent in bonds and 0.3%, investment in real estate — 10%. Investments by the government last year was the lowest since 1999 — 42 billion Norwegian kroner ($4.9 billion) — far below the average level of state support over the last 18 years, which averaged 187 billion kroner a year ($21,79 billion).

“2015 was volatile, was accompanied by negative interest rates, turbulence in the currency market, the fall in oil prices and weakening expectations for growth in emerging markets, — explained the General Director of the Fund Manager Norges Bank Investment Management Yngve Slyngstad.

In 2015, the proportion of shares in the portfolio of the Fund stood at 61.2 per cent, bonds — 35.7 per cent; investment in real estate was 3.1 per cent. The yield of investments in stocks and bonds exceeded the targets by 0.5%. The market value of the Fund’s assets amounted to 7.5 trillion kroner ($856 billion) against 6.4 trillion kroner in 2014. The average annual return of the Fund over the last ten years amounted to 3.35 per cent target at 4 per cent.

The final result Slyngstad called satisfactory. Negative return was avoided due to increase of investments in real estate (in the past year, the Fund invested in Unlisted real estate funds 44.2 billion kronor ($5.2 billion) and investments in shares of Japanese companies and drug manufacturers. The revenue outweighed the loss from oil assets and investments in emerging markets, particularly in Brazil. The loss-making assets in this Latin American country amounted to 38.2%. The inflow of funds from taxes on the oil industry, Statoil dividends and direct investments in oil and gas fields in Norway last year amounted to 42 billion kroner ($4.9 billion).

Increase the capitalization of the Fund’s assets due to investment income, capital inflows and exchange rate fluctuations. In particular, the weakening of the crown in relation to many currencies in which the Fund invests, has increased the value of its assets at 668 billion kroner ($76.3 billion).

Successful investment

Norway is the fifth largest exporter of crude oil. According to the Ministry of Finance of the country in the last ten years in the oil and gas sector accounts for 23 to 33% of GDP. According to the latest data of the European Commission, he currently provides about 22% of GDP and 67% of exports.

Amid a sharp fall in oil prices since mid-2014, the aggregate growth of industrial production in Norway fell from 0.06 to minus 0,01. As noted Reuters in February, the unemployment rate increased from 3.2% in mid-2014 to record for the last ten years is 4.6%. The non-oil budget deficit in 2016, according to estimates by the Norwegian Ministry of Finance, will grow with 179,6 billion kroner ($21 billion) in 2015 to 207,8 billion kroons ($24.4 billion).

This year, the Central Bank of Norway for the first time in history, withdrew money from the sovereign Fund to cover the budget deficit. In January it was taken to 6.8 billion kronor ($797 million), equivalent to 80 billion euros ($9.4 billion) a year. “While this is still a very small amount in comparison with the volume of the Fund. In addition, we receive cash from investments: last year, its volume amounted to 191,5 billion kronor ($22.4 billion), said Slyngstad during the presentation of the annual report, reports Bloomberg. — Thus, only through these funds, we can reimburse the withdrawn money twice.”

The investment strategy of the Norwegian sovereign Fund investments in assets around the world. As of the end of the year 40% of investments were in North America (38.9 per cent a year earlier), 38,1% — in Europe (39.3 per cent in 2014), 18.1 per cent in Asia and Oceania (17,5% the previous year). The Fund reduced investments in emerging markets from 10.6 to 9.8%.

The Fund owns shares of different volumes to more than 9 thousand companies in various industries — from oil to IT, including Amazon, Microsoft, Royal Dutch Shell, Santander and Glenmore. The largest share in the shares are paper Nestle, Apple, Microsoft, pharmaceutical companies Novartis and Roche. The Fund invests in government bonds of the USA, Germany and Japan, as well as invests in properties in major U.S. cities (new York, Washington, Boston, San Francisco) and Europe (Paris and London).

The Fund plans to stick to the current strategy. According to its leader øystein Olsen, the need to sell securities the Fund does not have. As noted by Bloomberg, Olsen believes that income from dividends, interest payments and rents sufficient to cover the withdrawals from the Fund and ensure implementation of changes in the strategy for emerging markets. “We are in an advantageous position: the Fund is very large, and the cash that it receives, play an important role,” he said, adding that the value of these revenues in the future will increase.

Over the past decade, the Fund’s assets grew more than six times due to oil revenues, but with 2016, the net proceeds may be suspended because of the difficult situation on the oil market.

Cinched waist

Falling revenues from the sale of raw materials forced the sovereign funds of other countries — oil producers start to sell off foreign assets and bring money from the management of investment companies for the replenishment of exhausted budgets, and to maintain yields investing in risky assets.

The leader on the withdrawal of funds was Saudi Arabia, completed the 2015 budget deficit to 367 billion riyals ($97,8 billion). Unlike the sovereign funds of the UAE, Qatar and Kuwait, which, like Norway, are buying stakes in large Western companies and invest in real estate, the Saudi sovereign wealth Fund SAMA is investing in reliable assets — US Treasury bills, and distributes them on deposits in large banks. On stocks account for only about 20% of the Fund’s assets. Thus, its profitability is lower than funds of the Gulf countries, which follow a more risky investment strategy.

By March 2016 sovereign Fund Saudi Arabia reduced its foreign assets to a record $727 billion in August 2014 to $616 billion From March to September, in particular, he brought to the Western market of $50-70 billion, and in October sold the shares only traded on the NASDAQ companies with $1.2 billion.

To change the investment policy and accounts for the Qatari sovereign Fund Qatar Investment Authority. Reporting it does not publish the value of its assets Sovereign Wealth Funds Institute estimated at $256 billion in 2014, estimates were approximate in the neighborhood of $100-200 billion budget Deficit is expected in the Emirate this year at the level of 4.9% of GDP. Initially, the Qatar Foundation focused on buying European blue chips, in particular Volkswagen, Total, Credit Suisse, a Swiss oil trading company Glencore; on European assets accounted for 80% of the Fund’s investments. Last year he had to sell his stake in German construction company Hochtief AG, two major office buildings in London for $845 million stake in film Studio Miramax and French construction group Vinci. In March, however, the Fund acquired an office property in Los Angeles for $1.35 billion

Another major oil exporter Kuwait has a budget deficit of $27 billion (15% GDP). Its sovereign wealth Fund Kuwait Investment Authority (fifth in terms of assets — $592 billion, according to Sovereign Wealth Fund Institute) is preparing to sell the assets whose yield is below 9% per year. Their cost is estimated at $30 billion package of Investment Fund is very diversified: it includes shares, bonds and property in China, Europe and the USA. In the spring of 2015, the Fund announced a reduction of its presence in the U.S. in favor of Europe — it attracted the European Central Bank launched a quantitative easing program.

Reasons for the recovery in oil prices in the next couple of years yet. The slowdown of China’s economy, one of the largest consumers of oil, reduces global demand. Iran, which lifted sanctions, will increase the supply of oil to the market. According to the International energy Agency, the oversupply of oil will persist at least for 2016.