World’s biggest wealth fund struggles under weight of trade war

by BLOOMBERG

Norway’s $1 trillion wealth fund had a return of $20 billion in the second quarter, erasing losses for the year, even as it faces growing challenges to its global investment model.

Helped by a rally in U.S. markets and oil and gas stocks the world’s biggest wealth fund delivered a return of 1.8 percent in the second quarter, or 167 billion kroner ($20 billion). Its total stock holdings rose 2.7 percent, while bonds were unchanged and real estate provided a 1.9 percent return.

“In the second half of the period, the prospect of increased trade barriers and a weaker growth outlook in Europe, China and emerging markets had an adverse effect,” the fund said. “Political uncertainty in Italy impacted negatively on European financial markets.”

Investing Norway’s oil wealth abroad, the fund has been set up to capture the fruits of globalization and the growth it drives, a philosophy that’s now being challenged by U.S. President Donald Trump’s imposition of tariffs on key trading partners across the world. The investor, which owns about 1.4 percent of global stocks, also sticks closely to indexes, making it hard to navigate around global turmoil.

“The prospect of increased trade barriers is something that is high on everybody’s agenda, and of course for a long-term global investor like the fund,” Trond Grande, the fund’s deputy chief executive officer, said at a press conference. “It’s fair to say that increased trade barriers, or even trade wars, will not be beneficial for the fund as a long-term global investor.”

The fund lost 5.7 percent in emerging market stocks and 4 percent on Chinese equities. The biggest sector driver for its returns were oil and gas stocks, which it has proposed divesting. Financial stocks were the weakest performers, led by Banco Santander SA.

Nearing 70%

At the end of the quarter, the fund held 66.8 percent in stocks, 30.6 percent in bonds and 2.6 percent in real estate. The return missed the benchmark index by 0.2 percentage point.

Equity markets regained some momentum in the quarter after tumbling at the start of the year amid a spike in volatility. The fund is also skewed more toward Europe, missing out on some of the bigger tax-cut fueled gains in the U.S. market.

Even so, it’s a major shareholder in the U.S. tech giants. Its largest stock holdings at the end of the quarter were Apple Inc., Amazon.com Inc. and Microsoft Corp. Its largest bond holdings were in U.S. Treasuries, followed by Japanese and German government debt.

The fund is also in the midst of increasing the portion of stocks in its portfolio to 70 percent after a go-ahead last year. The remainder is held in bonds. It can also hold a maximum of 7 percent of its investments in real estate.

Weighed down by negative interest rates over the past few years, the government recently lowered its expected real return target to 3 percent from 4 percent. A slump in crude prices also forced to the government to make its first ever withdrawals in 2016, but that has now ended. Stoked by a recovery in oil prices and rising petroleum income, the government in June made its first deposit to the fund in almost three years.

Outflows from the fund slowed to 2 billion kroner in the second quarter, after the fund received its first deposit since 2015 in June.