The chief executive of Norway’s $1.4 trillion sovereign wealth fund says he sees limited scope to dodge a potential inflation shock after warning such a development would hurt both stocks and bonds.
For Norges Bank Investment Management, the world’s biggest sovereign fund, its sheer size renders it hard to make the reallocations needed to prepare for such a shift, according to CEO Nicolai Tangen.
“We are very long-term investors, and we’re so big it is kind of difficult to move around,” he said in an interview with Bloomberg Television’s Jonathan Ferro on Wednesday. “We are in a way also too big for counterparties.”
Tangen, a former hedge-fund manager who’s been running Norway’s giant sovereign investment vehicle for almost a year, has repeatedly cautioned against expecting continued bumper returns. He says inflation is now emerging as the biggest threat, and that it probably won’t unfold in the same way as in previous cycles.
“We are at a situation now where bond yields are extremely low and the stock market is extremely high and so therefore any major change in inflation will hit both parts of the portfolio,” he said. “In the past, it’s been one and not the other. But this time, both can move in the same direction.”
That’s amid an ongoing debate as to whether price growth is “transitory” or becoming more entrenched. U.S. inflation has been above 5% for the past two months, the highest in over a decade. The fund said on Wednesday that the “strongest performance” of the first half was “in sectors exposed more to inflation, such as energy, financials, materials, real estate and industrials.” What’s more, “the highest returns shifted from growth stocks to value stock.”
Norway’s wealth fund generated a 9.4% return in the first half of the year, with its stock portfolio up almost 14%. Investments in bonds and renewable energy infrastructure slipped, while real-estate holdings grew. Its total return, equivalent to roughly $110 billion, was marginally higher than that of the benchmark against which it measures itself.