Norway ready to take on China challenge

Sovereign wealth fund chief says he plans to increase A-share exposure, reports Bloomberg.

Once a year, the man running the world's biggest sovereign wealth fund travels around China for a week.

Though assets from the country make up only about 1.5 percent of the $860 billion Norwegian wealth fund's portfolio, Yngve Slyngstad, its chief executive officer, said almost all investment decisions are affected by what happens in China.

Understanding what is poised to become the world's largest economy is crucial for Slyngstad as he manages a fund that Norway predicts will reach $1 trillion in less than three years. He will be in China this month, visiting Beijing and other cities.

"Every time I come back, my perception of China has changed," said Slyngstad. "There has been more and more of a question mark over what's the next step for that economy. The uncertainty among investors is partially due to the very simple fact that it's more difficult to know what's happening in that large economy than in any other."

The composition of the global economy, including the future of emerging markets such as Brazil, Indonesia and South Africa, will be decided in China, Slyngstad said.

Yet growth in China, which by some calculations is already bigger than the US economy, is slowing and the lack of transparency is making it hard for investors to understand exactly why.

Slyngstad, who last year visited Shenzhen, Hangzhou and Shandong province, is looking for investments to channel billions of dollars in Norway's oil cash. He has been lobbying the Chinese government to allow the fund a bigger quota than the $1.5 billion it's permitted to place in Chinese A shares.

"The reason why I spend some time going around there is because it's less of a homogenous economy than is widely perceived," he said. "We as a fund have a strong interest in China and still a strong belief in the importance of the development of that economy."

The fund can also invest in the Chinese mainland through listed companies in Hong Kong. Its exposure to the country amounted to 2.7 percent of its stocks in the third quarter, up from 2.5 percent at the end of 2013. Holdings include oil producer and explorer PetroChina Co and Industrial & Commercial Bank of China Ltd, the world's largest lender by assets.

Norges Bank Investment Management, which runs the fund as part of the central bank, owned 1.3 percent of global stocks at the end of last year. Norway's Finance Ministry has set the broad guidelines at 60 percent in equities, 35 percent in bonds and the rest in real estate.

Figuring out how to invest in China is just one of many hurdles. Slyngstad said one of the main worries now is how monetary policy will affect his investment decisions. Continued turmoil in Europe and distortions in credit markets also cause concern. Old rules do not always apply as the very nature of the capital markets has changed, he said.

"A continuous lowering of interest rates in many countries and unwillingness of some countries to step up and move interest rates back again have actually in some way structurally moved the whole capital market interest away from the bond market and toward the currency market," Slyngstad said. The fund in June said it would expand its bond investing to include more currencies in an effort to increase returns.

Slyngstad said the fund is now "less invested in" credit markets after excess liquidity distorted prices. He is adjusting the portfolio even after corporate bonds were the fund's best-performing asset class in the third quarter.

"It seems like spreads are coming in but it's a secondary effect of monetary policy that from our reading has increased the need for pondering," he said.

Slyngstad is also watching how the Ebola crisis will unfold. "In general, the possibility of a pandemic is underestimated in the market," he said.

After working as head of equities, Slyngstad became CEO of the fund at the beginning of 2008 and said his tenure has coincided with a "fascinating period" in financial markets.

The financial crisis - during which the fund has bought up cheap securities everyone else was selling - has challenged truths about investment management, monetary policy, the economy and the financial markets, he said.

It has showed that the financial industry has the capacity to heal itself, with or without the help of regulators, according to Slyngstad.

The power of the crisis could be called "Schumpeterian creative destruction", said Slyngstad, who has studied German philosophy.

"Crisis within the financial sector also serves a purpose," he said. "You have to be careful about something that without a crisis looks stable, but may also turn stagnant."

The fund, which has been struggling to meet a 4 percent real-return target set by the government amid plunging interest rates, wants to broaden its investment universe to include infrastructure and private equity.

While the infrastructure market currently is not big enough at the global level and presents too much regulatory risk, the fund is preparing for the day the government gives it the green light.

The Norwegian government has said it will first judge the fund's performance in real estate, where it is now boosting its investments toward 5 percent from 1.3 percent.

A discussion on broadening the asset mix of the fund is coming "no matter" what, and a tipping point could be when it has reached 4 percent in real estate, Slyngstad said. The fund has so far snapped up properties on Times Square in New York, the Avenue des Champs-Elysees in Paris, London' Regent Street as well as San Francisco, Washington and Zurich among other cities.

"That will be a natural touch point," he said. "Both for the real estate question, and for the real assets question."