The best trades in history… Norway’s rainy-day fund

In late 1969, the Ekofisk oil field was discovered in the North Sea by Phillips Petroleum Company, and it became obvious that it contained a large amount of oil. Within two years, the field was consistently producing, and Norway’s government introduced new regulations to ensure that it, rather than the oil firms involved, received most of the revenue. Thanks to these policies, as well as the rise in oil prices, large sums of money flowed to the Norwegian treasury, enabling the government to support a high level of public spending.

What was the investment?

After two decades it became obvious that simply spending the tax revenue was not a good idea. It made the prospects for the economy, already highly dependent on oil, even more closely linked to the price of crude. When prices were high, the spending from the increased oil revenue, as well as the booming economy, would create inflation; during times of low prices, the government would be forced to cut back spending, just as the wider economy was going into recession. As a result, the Norwegian parliament decided in 1990 to pay some of the oil revenue into a sovereign wealth fund, starting in 1996.

What happened?

Initially, only a fraction of the revenue was saved, starting with an initial payment of just $325m. Soon most of it was being put into the fund – a total of $560bn was paid in over the following two decades. Around 3% of the total fund is paid to the government as a dividend, the rest is reinvested. The fund’s valuation passed the $1trn mark in 2017, and is currently $1.3trn, nearly $200,000 for each of Norway’s 5.37 million people.

Lessons for investors

Norway’s example shows that if you save consistently, invest and reinvest, while resisting the temptation to spend too much of the capital, you can accumulate large sums that can provide a substantial income (Norway’s fund delivers around 20% of government spending). And the decision to put two-thirds of the fund in shares reveals their importance for long-term returns. The move has been less good for the oil companies, who saw their returns limited by the tax reforms of the 1970s – a lesson on the importance of political risk.