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October 25, 2016

The most important news for investors this month

Large institutional investors like pension funds or endowments have an excellent track-record and often represent industry best-practice. In our opinion, most individual investors should not deviate too much with their own investment strategy. So when the largest sovereign wealth fund in the world discusses a potential shift in its investment strategy, individual investors should maybe take notice. Norway’s $880 bn oil fund could be on the cusp of a major change in its asset allocation following the conclusion of a government-commissioned report.

No need to re-invent the wheel

I have worked for 15 years at Credit Suisse in London and Hong Kong covering institutional investors and I could see first-hand what works and what doesn’t. Norway’s sovereign wealth fund is not only the largest fund of its kind in the world, it is also one of the best run funds out there in my opinion.

The government-commissioned report recommended that the fund should increase its equity allocation from currently 60% to 70% and reduce its bond allocation accordingly. As the study concluded „A higher share of equities increases expected return… but also entails more volatility and a higher risk of a decline in its long-term value. The majority [of the commission] is of the view this risk is acceptable.“ The central bank of Norway, which manages the fund, will respond in December.

The summary is clear: in today’s zero interest rate environment, the only way to increase the long-term return potential lies in a higher equity allocation. There are no short-cuts.

Is this a buy signal for equities?

No. Nobody has a crystal ball, not even the Norwegians. This is not what the potential change in the investment strategy is about. The government commissioned report is not trying to guess where stocks, interest rates or exchange rates will be at a certain point in the future. The commission is simply trying to align the asset allocation with its own financial goals. At the moment, the goal is a 4% withdrawal rate without touching principal. With the current target asset allocation of around 60% equities, 35% bonds and 5% property this is becoming increasingly difficult to achieve.

So what should you do then?

Let your goals drive your own asset allocation. You do not need to have such a high equity allocation if your withdrawal rate is lower. The emotional stress from having a large but volatile equity allocation should not be underestimated. After all, what is the point of having a perfect plan if you are not able to stick with it?

So before you start putting money into various investments, ask yourself one question: What exactly are you saving and investing for?

If you would like to schedule a call to discuss your goals and your portfolio, please give us a ring at +49 89 89 89 95 05 or send us an email. We’d be more than happy to speak with you.

 

*** Update 1. Dec 2016 ***

On Dec 1st, the Norwegian Central bank recommended to raise the equity allocation to 75% from 60%. This is even higher than what was suggested in the government-commission report.