World's biggest wealth fund set to drop emerging markets and yen

Norway's sovereign wealth fund's proposal could potentially have a large impact

Trond Grande, the deputy chief executive of Norges Bank Investment Management, Norway's sovereign wealth fund. The fund is proposing to exit emerging markets and the yen. Vegard Giskehaug for The NatiShow more

Norway’s sovereign wealth fund proposes sweeping changes to its US$333 billion bond portfolio, including dropping the Japanese yen, emerging markets and corporate bonds, as it expands its stock holdings.

The $980bn fund recommended it pare its bond index to only include securities denominated in dollars, euros and pounds, according to a letter sent to the Norwegian finance ministry. Emerging market bonds and corporate debt should be removed from the index and “systematic strategies” should be put in place to invest in these, it said.

“In the long term, the gains from broad international diversification are considerable for equities but moderate for bonds,” the fund said. “For an investor with 70 per cent of his investments in an internationally diversified equity portfolio, there is little reduction in risk to be obtained by also diversifying his bond investments across a large number of currencies.”

The fund’s proposal will need be approved by the government, but could potentially have a large impact. It held 169bn kroner (Dh77.13bn) in Japanese government bonds at the end of the second quarter, 63bn kroner in Mexican government bonds and 53bn kroner in South Korean government bonds. Some 12.3 per cent of its 2.6 trillion-kroner bond portfolio was held in emerging market currencies at the end of the quarter.

“The Japanese bond market is large but far less liquid than those for the other currencies that currently have a substantial weight in the index,” the fund said. “An index consisting of bonds issued in dollars, euros and pounds alone will be sufficiently liquid and investable for the fund.”

The fund also recommended that it set an upper maturity level of 10 years on its bond holdings, to improve liquidity and reduce “uncertainty about the fund’s volatility”.

The currencies in the index should be assigned weights based on GDP, the same as now. The bond index consisting of dollars, euros and pounds will result in the following weights based on the current calculation method: 54 per cent in dollars; 38 per cent in euros; and 8 per cent pounds, it said.