Norway’s $880bn SWF to target frontier markets like Nigeria

Norway’s $880 billion sovereign wealth fund, the world’s largest, will expand its scope of investments to target “frontier markets” and add more currencies to generate higher returns.

Frontier markets, also called pre-emerging markets, have equity markets that are less established than in emerging markets.

These include countries such as Nigeria, Argentina, Ukraine and Kazakhstan, according to MSCI Inc.

The MSCI Frontier Market Index is up 16 percent this year compared with a 5 percent gain for the MSCI World Index of developed market shares. Nigerian equities made up 20 percent of the MSCI FM index as of June 2014.

The fund will broaden its “exposure to different sources of return and seek to exploit time-varying investment opportunities,” Norges Bank Investment Management (NBIM), which manages the fund, said in a strategy report published this week.

NBIM expects to invest 1 percent of the fund in private real estate in each of the next three years, it said.

“New frontier markets will be added to our equity investments, and the scope of our fixed-income investments will be widened to include additional currencies,” NBIM said in the report, which sets its strategy through 2016.

The fund, which owns 1.3 percent of the world’s equities, has returned less than 4 percent on average since it started investing in the late 1990s.

Norges Bank Governor Oeystein Olsen, who oversees the fund, has said it must take on more risk to increase returns. In addition to infrastructure and private equity, he advocates increasing stock holdings to 70 percent from the current 60 percent limit.

It will also increase the number of employees to about 600 from 370 now, mostly outside Norway, including 200 for its real estate division, the fund said.

The goal of a 4 percent real return over time will be “better served if a larger share of the fund is invested with the global economy,” the fund said. NBIM will “prepare the organisation for a change in this direction,” it said.

The fund is allowed to hold 35 percent in bonds and 5 percent in real estate. Since being freed to expand into the property market in 2011, the asset class makes up about 1 percent of its total portfolio.

The fund is looking to expand into real estate in Asia and reiterated its interest in “global cities outside Europe and the U.S.” While real-estate investments from London to San Francisco have mostly taken the form of joint ventures, the fund is now preparing to manage fully-owned properties with a more active role in development, it said.

“Larger ownership stakes in listed real-estate companies and public-to-private transactions will be considered,” the fund said.

Norway, western Europe’s biggest oil and gas producer, channels its petroleum income into the wealth fund to shield the $500 billion economy from overheating.

The fund got its first capital in 1996, added stocks in 1998, emerging markets in 2000 and real estate in 2011. The government is allowed use the targeted 4 percent return to plug budget deficits.