Wealth fund eyes new bond strategy

Japanese yen would be dropped

OSLO • Norway’s sovereign wealth fund proposed sweeping changes to its US$333 billion bond portfolio, including dropping the Japanese yen, emerging market and corporate bonds, as it beefs up on liquidity amid an expansion of its stock holdings.

The US$980 billion fund recommended paring its bond index from 23 currencies to only include securities denominated in dollars, euros and pounds, according to a letter sent to the Norwegian Finance Ministry. Emerging market and corporate debt should be removed but “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 proposal will need to be approved by the government, but could have a large impact. It held 169 billion kroner (US$21 billion) in Japanese government bonds at the end of the second quarter, 63 billion kroner in Mexican government bonds and 53 billion kroner in South Korean government bonds.

Some 12.3 per cent of its 2.6 trillion-krone 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 currencies in the index should be assigned weights based on GDP, the same as now. The 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 in pounds, it said.

Keeping, and even proposing to boost, the pound as one of its currencies is another vote of confidence in the U.K. post-Brexit. The fund rushed in to buy U.K. real estate right after the referendum last year in which U.K. voters decided to leave the European Union. It owns large swaths of central London in a partnership with the U.K.’s Crown Estate.