What happens if a whole country diversifies? - October 16, 2019

What happens if a whole country diversifies?

We often write about the importance of diversification and discipline as keys to success. It may seem to you that this is only a guide to everyday investors, but the reality couldn’t be farther from it. There is a tremendously successful country which does the same with its $1 trillion fund. Let’s dive into the Norway method.

Norway has the biggest sovereign wealth funds in the world. It’s called Government Pension Fund Global and its value broke $1 trillion in 2017. That means that every single Norwegian citizen has a wealth of $195,000 in this fund, which is not only huge, but successful too.

How did it happen?

Imagine Norway as a lottery winner. Before the 1960s, it was a moderately poor country. Then huge oil reserves were found at their shores. Here comes the trick, though. Unlike most lottery winners who go bankrupt just years after their bless, they did the clever things. Norway didn’t start to spend money endlessly. They decided to keep taxes high, and in the meanwhile save the unbelievable oil profits for great causes as well.

Value of Norway's Government Pension Fund Global

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First, they founded the government pension fund, then in 1990 they created the “Government Pension Fund Global”.  What’s the purpose of this entity? Simple: their “role is to manage the wealth in the fund for future generations safely, efficiently, responsibly and transparently”. Their main objective is to reach the “highest possible long-term return”.

Diversification is the key

The fund is managed by Norges Bank, which is an entity of the Norwegian Central Bank. One key to their success is the serious diversification. They explicitly state this: “We spread our investments across markets, asset classes and companies to reduce risk”. According to their yearly report, in 2018 “the fund’s asset allocation was 66.3 percent equities, 3.0 percent unlisted real estate and 30.7 percent fixed income”.

Diversification of the fund by instrument (2018)

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We’re talking about so much money, that the fund’s stock holdings alone make up 1.5% of the global stocks and shares market. Yet, they still take diversification seriously.

Diversification of the fund by territory (2018)

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Their board decides what they invest in. They don’t buy stocks of companies for example that they find unethical. But their most interesting investment rule is probably this one: they don’t invest in Norwegian instruments, like stocks or bonds. Why is that? Because they take diversification that seriously. They want their fund to be independent from Norway’s economy. This way, even if the country has problems (like a recession), they can still benefit from their fund.

This is diversification at its best, and it works for a whole country.

What is it used for?

As we quoted above, the fund’s main purpose is to ensure the safety of future generations. This can be done through education and healthcare, which are both stellar in Norway. But the government can also withdraw amounts directly from this fund for important causes. They, for example, help the spread of electric vehicles from this source.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.