* Majority says equities weight should go to 70 pct from 60
* Says would mean more volatility in returns, but acceptable
* In dissent, leader says risk of "boom and bust" fiscal
(Updates with release of the report, quotes, background)
By Gwladys Fouche
OSLO, Oct 18 Norway's sovereign wealth fund
should raise the proportion of its investments in equities to 70
percent from 60 percent to the detriment of its bond holdings,
the majority on a government-appointed commission said on
Its chairman dissented, saying equity holdings should be
If the increase was done today, it would mean the world's
largest sovereign wealth fund, currently valued at $875 billion,
would move $87 billion into equities away from government
bonds, whose low interest rates are dragging down the fund's
Any reallocation of the fund's assets is expected to take
several years, however.
Eight of the nine members on the panel - made up of two
former finance ministers, economists and financial investors -
said a higher share of equities would increase the expected
return of the fund and the contribution to the state's budget.
"It entails more volatility in the value of the fund and a
higher risk of a decline in its long-run value. The majority is
of the view that this risk is acceptable," commission member
Hilde Bjoernland told a news conference, when presenting the
view of the majority on the commission.
The fund can currently invest up to 60 percent of its
investments in equities, 35 percent in fixed income and 5
percent in real estate. It holds stakes in around 9,000
companies across 78 countries. It cannot invest in Norway.
Finance Minister Siv Jensen partly appointed the commission
because the fund's bonds returns have been hit by low interest
"We know that we have a very low interest rate regime
globally and since (more than a third of the) portfolio is
invested in bonds, that will of course affect the return of the
fund over time, especially if interest rates remain at a very
low level for a long time," she told Reuters.
The central bank, which manages the fund, will respond to
the proposals in December, and the Norwegian finance ministry
will use the conclusions in its annual white paper in April,
which is expected to include a recommendation to parliament.
The head of the commission, Knut Anton Mork, dissented with
the majority and said that the fund should cut its investments
in equities to 50 percent of the total instead and transfer the
difference into government bonds.
The fund is now so big - two-and-a-half the size of the
country's gross domestic product - that swings in the fund's
return would make the state's withdrawals from the fund to use
in the state's budget less predictable, he said.
"My main concern ... is the risk of boom and bust in
government spending, services and tax rates," Mork, a former
chief economist at Handelsbanken in Oslo, told Reuters.
A lower share of equities in the portfolio would mean the
fund would have a lower return. "Fiscal policy needs to adapt to
this fact," he said.
Currently government can spend an average of 4 percent of
the wealth fund per year, the expected long-term return of the
fund, but low interest rates and other market conditions make it
unlikely that the fund can earn returns to replace that amount,
The commission did not give a recommendation for what the
spending rule should be in the future, but estimated the real
rate of return to be just 2.3 percent per year for the next
three decades under the current asset allocation,
Changing the fiscal spending rule, in place since 2001,
would be a major policy departure. Until recently, any
suggestion of changing it has been rejected by successive prime
ministers, but earlier this month Prime Minister Erna Solberg
said it should be tightened.
(Reporting by Camilla Knudsen, writing by Gwladys Fouche,
editing by Terje Solsvik/Jermey Gaunt)