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Tech losses take toll as Norway’s oil fund suffers record value fall in H1

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Nick Evans writes that detailed first-half results from Norges Bank Investment Management, the manager of the world’s largest sovereign wealth fund, underline the scale of the damage wrought on the portfolios of the largest global institutional investors by the steep and simultaneous declines in both equities and bonds during the tumultuous first six months of 2022.

The country’s Government Pension Fund Global – also known as the Oil Fund – reported its biggest loss in asset value terms, as a -14 per cent negative return in H1 reduced the fund’s assets by around USD175 billion over the six-month period to some USD1.2 trillion.

Although the size of the loss in the first half of the year is smaller in percentage terms than the -23 per cent drop in the fund’s value during the peak of the global financial crisis in 2008, the absolute fall in dollar terms is significantly larger due to the growth in the fund’s asset portfolio over the last few years.

Over the previous three years, for instance, the Oil Fund had recorded double-digits in each calendar year – returning 15 per cent in 2021, 11 per cent in 2020 and 20 per cent in 2019. Since its inception in 1998, the fund has returned an average of 6 per cent annually – growing in size from around USD2 billion in 1998 to more than USD1 trillion in assets today.

But the abrupt reversal in global markets this year, across both equities and fixed-income, created uniquely challenging conditions for major asset owners and asset managers – with the highest inflation in over 40 years, rising interest rates, economic slowdown, surging oil and gas prices, and geopolitical conflict triggering a -20 per cent fall in the FTSE Global All Cap equity index over the first six months of the year and sharp increases in global bond yields.

Most of the damage to the Oil Fund’s portfolio was done in the second quarter of the year – with a Q2 loss of -10 per cent representing just over 70 per cent of the overall -14 per cent drop in value during H1.

The fund’s managers – led by chief executive Nicolai Tangen, who was previously the founder of well-known long/short equity hedge fund AKO Capital – reported a -17 per cent loss in the equities portfolio (which accounts for 68.5 per recent of the fund’s assets) and a -9 per cent loss in the fixed income portfolio (which accounts for 28.3 per recent).

Technology stocks were by far the largest contributors to the H1 losses – with the fund’s tech equity investments suffering a fall of -28 per cent during the first six months, representing an overall dollar loss of over USD40 billion.

Of the top 10 negative single contributors to the fund’s absolute return in H1, nine were technology stocks – comprising Amazon, Apple, Microsoft, Nvidia, Alphabet, ASML, Tesla and Netflix.

The only non-tech investment on the top 10 losers list was German real estate company Vonovia – with the fund also reporting a -6 per cent total return in the first half from its real estate portfolio as a 7 per cent gain in its unlisted real estate holdings was more than offset by a -21 per recent fall in listed real estate investments.

Despite the size of the losses, the managers pointed to what they called the “strong excess return” delivered by the fund over its benchmark index during an exceptionally turbulent period in global markets.

According to Norges Bank, the Oil Fund delivered a 1.14 per cent excess return over its benchmark index in H1 2022, and 0.57 per cent in Q2 – well ahead of the 0.32 per cent long-term annual excess return that the fund has generated since its inception in 1998.

In absolute value terms, the managers said, the excess return generated in H1 2022 of over USD1.5 billion represents around 40 per cent of the total USD4 billion in excess returns that the fund has delivered during its 25-year life.

In a presentation, the managers also pointed to the more positive market environment in the third quarter of the year so far – with global equities rallying in July. As of mid-August, the Oil Fund’s value is up by around 5 per cent since the half-year mark at the end of June.

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