Will the largest sovereign wealth fund increase stock investments in Sri Lanka?
Norway’s $875 billion sovereign wealth fund—the world’s largest—has 60% of assets invested in stocks of over 9,000 companies in 78 countries, including 12 firms in Sri Lanka. The manager of the fund, Norway’s banking regulator Norges Bank is proposing to increase the equity allocation to 75% on conclusion that the stocks offer greater potential returns than bonds. Bonds are currently allocated 35% of the fund’s assets, while the balance is held in real estate. In 2015, the fund invested $31 million in Sri Lanka, buying less than 3% stakes in listed companies in banking and finance, telecommunications, engineering and cement, fabrics, and glass manufacturing.
“The fund’s entry is a vote of confidence for the economy because it is very conservative in its investments,” says Thorbjorn Gaustadsaether, Norway’s Ambassador to Sri Lanka. In 2015, the fund’s highest investment here was $5 million for a 0.84% stake in Hatton National Bank, followed by $4.7 million for 0.78% in telco operator Dialog, $3.6 million for 0.24% in John Keells (which has interests ranging from finance, hotels, real estate and shipping) and $2.6 million in construction firm Access Engineering for a 1.65% stake.
Quarterly reports for September 2016 showed Norges Bank increasing stakes in most of these companies. The fund’s stake in HNB increased sharply to 6% at end September 2016, followed by Commercial Bank to 5.6%, Distilleries to 1.9% and Access Engineering to 2.4%. It’s too early to know how the fund invested here in 2016. and its plans for 2017. “If the investments here perform well in 2016, they may invest more,” says Gaustadsaether. “We will have to wait for the fund’s annual report in early 2017 to know, because the government does not get involved in managing the fund. The important thing is that they invested in the first place,” he says.
Norges Bank buys small parcels of listed stocks in several companies to spread the risk. Laws limit ownership up to 10% of any listed company. Forty analysts at the bank research markets and companies, selecting equities, bonds and real estate assets to be invested for the long term. Around 4% is held by external portfolio managers instructed to research specific sectors or companies. Lynear Wealth Management is believed to have handled the Sri Lankan equity investments.
“The fund’s entry in 2015 may have something to do with the business climate improving since then. I assume the fund has been looking closely at Sri Lanka’s stock market for some time and identified companies that are doing well,” Gaustadsaether says.
Norway’s North Sea oil wealth feeds the fund, which is now twice the size of its gross domestic product. Despite its name, the ‘Government Pension Fund Global’ (fund) does not provide pensions. Norway is just saving its oil revenue surpluses for the future.
Our population is aging and oil is not going to last forever. The fund is not interested in quick returns, but giving the people of Norway security in the future. The fund looks for stocks that can give better long-term returns with minimal risk; that’s what they looked for in Sri Lanka,” says Gaustadsaether.
The fund was set up in 2006 by merging an insurance fund set up in 1966 when Norway began drilling for North Sea oil and a 1990 pension fund set up with petro dollars. Norway first struck oil in 1969, producing its first barrel in 1980. Laws protect the fund from capital erosion. The government gets only 4% of the fund’s annual returns to balance its budget.
Over the last 10 years, the sovereign wealth fund made an annual average return of 5.6%, with equity investments returning 5.3% and bonds 4.9%. It made a 4% return in the third quarter of 2016, with equity making 6%, bonds 0.9% and real estate 2.3%. Equity returns from the fund’s investments in emerging markets in Asia Pacific was the highest at 8.7%, with Chinese stocks returning nearly 11%, followed by Europe at 6.2% and the US at 4.7%.