Institutional investors won't be pleased or surprised at the news that the US$1.3 trillion Norway's Government Pension Fund Global (GPFG), the world's largest sovereign wealth fund, saw a negative return of 14.4% in the first half of 2022.
Nicolai Tangen, chief executive officer of the wealth fund’s manager Norges Bank Investment Management pointed to rate hikes, high inflation and the war in Ukraine as key causes for the $174 billion loss.
He cited in particular a 17% decline in equities, which constitute 68.5% of the total GPFG portfolio, and an especially bad performance for technology stocks, which had a minus 28% return. Fixed income, which makes up 28.3% of the GPFG portfolio, saw a loss of 9.3%, whereas unlisted real estate, which contributes 3% of the portfolio, saw a positive return of 7.1%.
Norges Bank did note that the fund performed 1.14% better than the benchmark after a brutal first half for stock markets everywhere.
Commentators expect the GPFG to perform better than rivals coming out of this trough due to its highly diversified portfolio and solid management. And with US equities at least already showing something of a recovery in the second half of 2022, the full year’s investment story could turn out to be a game of two halves.
The results do illustrate, however, the penalties from investment in high-risk high-growth tech stocks as the market turns resoundingly against such investments. Furthermore, rising interest rates appear to have moved the global economy firmly away from the low-to-zero interest rate environment seen across the developed world in recent years. The GPFG’s short-term performance is already one indicator of where things are headed, and its medium-term performance is likely to be the same.
There is one more potentially contentious dimension to the GPFG’s expected recovery. The wealth fund is still not a member of the Net Zero Asset Owner Alliance convened by the United Nations, despite persistent blandishments to join. As Tangen noted in the results statement, “in the first half of the year, the energy sector returned 13%. We have seen sharp price increases for oil, gas, and refined products”.
Norway already contributes some 25% of the European Union’s gas imports, and is able to up this if required to compensate for declines from sanctions-hit Russia. The government has a strong and historic anti-climate change policy. There could be an interesting balancing act ahead for the GPFG.