1) THE NORWEGIAN WEALTH FUND | A FINANCIAL MASTERPIECE

Norway is known for its stunning natural scenery. Still, an investment nerd cannot help but get drawn to the history, performance, and size of its financial hand-made masterpiece: the Norwegian Wealth Fund, also known as the Norwegian Sovereign Wealth Fund, the Norwegian Pension Fund (Global), or the Norwegian Oil Fund.

However, don’t expect to open your wallet and invest in it: it is not available to private investors. In fact, it is owned by the Norwegian government, it is funded through government oil revenues, and it is managed by Norway’s central bank (or, more specifically, by the Norges Bank Investment Management – NBIM), which reports to the Ministry of Finance.

Still, given its world-class management and transparency, we can dig into its contracts, deals, and allocations and learn much about its Equity, bonds, and Real Estate investments, its long-term strategy, and returns.

As of today (July-2024), the NMIB manages assets worth more than 17 trillion kroner (1.5 trillion USD, or 1,590 billion USD).

A Norwegian journalist once joked that the fund had reached such an incredible size that no one would notice if we removed a couple of zeros from it!

In reality, this is not the case. The fund aims to ensure responsible and long-term revenue management from Norway’s oil and gas resources so that this wealth benefits both current and future generations of Norwegians.

Norwegians look closely at its market capitalization, as it gives them a sense of solace and peace of mind, knowing their future is somehow secured. While the fund is owned by the state, and Norwegians don’t own shares or equity in it, the fund is managed on behalf of the Norwegian people. Therefore, looking at the fund’s total value per capita, each individual Norwegian feels like “owning” around 3.3 million NOK (315,697 USD). Sweet!

In a Ted X talk, Arendal (2021) titled “Why every Norwegian is a millionaire,”  the fund’s CEO, Nicolai Tangen, commented that his work is to “safeguard the wealth for future generations.” [Internal note: they are millionaires in NOK, not USD]. 

In a more recent Podcast, Nicolai interviewed Jens Stoltenberg, ex-Secretary General of NATO (2014-2024), Prime Minister (2000-2001, 2005-2013), and Minister of Finance (1996-1997) of Norway. During the interview (YouTube minutes 32:23 -52:00), they discussed the history, challenges, and success of the Norwegian Wealth Fund and its fiscal rule. It was an excellent discussion that I transcribed.

Nicolai: In Norway, we have a spending rule that tells how much of the NWF can be spent every year to support the budget. It has been a cornerstone in the economic planning of this country. What inspired the creation of this rule?

Jens Stoltenberg. It was the understanding that Norway would get a lot of revenue from the oil and gas. When I was prime minister in 2000, we only had net revenues for 6 years; the first net revenues came in 1996.

At the beginning they were quite small, but then it was obvious we needed some way to design how much we could spend. We were very afraid of the Dutch disease, to spend too much.

It then started an academic and political discussion on how to establish a fiscal rule for all the oil revenues we could spend. The purpose was actually two-fold: one was to ensure not only our generation but also future generations get the benefit of the oil and gas resources that we have found on the Norwegian continental shelf. This is a kind of long-term perspective.

The other reason to establish a fiscal rule and a pension fund was to ensure we could stabilize the Norwegian economy, separate earnings from spending, and prevent the economy from overheating.

Therefore, we first established the pension fund in 1996, and more importantly, this fiscal rule, where we all decided that all oil and gas revenues were going to the Norwegian pension fund and that the only thing we were going to spend was the financial return, which we estimated at 3% per year in yield terms per year, that was average.

Therefore, the fiscal rule said we could only spend, on average, the fiscal return of the estimated 3%. That has served Norway very well.

Nicolai: It is quite a feat to achieve political consensus around the spending of such large resources, and it is probably one of the fund’s many successes.

Jens: It worked even better than I would have imagined. Partly because the fund got much bigger than we had expected, for many reasons: oil and gas production has been bigger, prices have been higher, and we have good investments because people like you have been able to manage the fund in a very good way. So the combination of all these things has made the fund much bigger and, therefore, also the fiscal rule more important.

 

Nicolai: If you had made a rule of how much the fund could have contributed to the budget in total.

Jens. Now it is nearly 25%. Almost ¼ of the Norwegian state budget is financed by the NWF. I am not able to give an exact number.

The idea was to last forever because, in one way, Norway spent zero of the oil revenues. The only thing spent is the fiscal return on the oil revenues, and that can last forever as long as we have the instalment.

The challenge is that we now have so much wealth in the stock market; we can have big fluctuations that can have an impact on the Norwegian economy; that is a new risk we did not face in the same way before. I am always a bit careful in changing fiscal rules too often because it undermines the credibility.

It is better to have an imperfect rule that is credible than to always run for a perfect rule that is constantly changed.

This is a self-imposed restriction, and the biggest success is that a democratic society such as Norway has been able to handle this enormous amount of cash without spending it. I remember back in the 1990s, when we had this discussion, and started to invest in equities and had the first allocation to the pension fund, many experts also economists colleagues of mine said this cannot happen, that democratic institutions, politicians will spend, if they get the money.

They were, therefore, in favor of reducing oil and gas production to keep the wealth on the continental shelf.

The actual former governor of the NCB led an expert group and said, “It cannot work. Politicians will spend if they get the money. We have proven them wrong, and that´s the biggest success.” But again, if you start to change these rules too often, you may undermine the magic or the line in the sand, which is the fiscal rule.

2) WHAT IS A SOVEREIGN WEALTH FUND (SWF) 

But what is a sovereign wealth fund? Is it unique to Norway?

A sovereign wealth fund (SWF), or sovereign investment fund, is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, and precious metals or alternative investments such as private equity funds or hedge funds. Sovereign wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or foreign exchange reserves held by the central bank.

As with Norway, a SWF is typically created when governments have budgetary surpluses. It is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate consumption. This is especially true when a nation depends on raw material exports like oil, copper, or diamonds. In such countries, the main reason for creating a SWF is the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.

SWFs in resource-rich countries are believed to help avoid the resource curse, which emerges when governments spend money immediately, overheating the economy. In such circumstances, saving money to be spent at a later stage is often desirable.

As market participants, SWFs can influence other institutional investors, who may see investments made alongside SWFs as inherently safer. This effect can be seen with increasing frequency, especially with regard to investments made by the Government Pension Fund of Norway (NBIM), Abu Dhabi Investment Authority, Temasek Holdings, and China Investment Corporation.

3) THE SIZE OF THE NORWEGIAN WEALTH FUND

When I saw NBIM’s figures, my first question was how the fund was able to reach such growth and dimension. With investments, size matters, and this fund, with 1.5 Trillion USD of Assets under Management (AUM), is simply huge!  In fact, it is reported as the world’s largest sovereign wealth fund, and the biggest owner of stock globally. 

Table: Wikipedia. Data as of June 2023

4) THE HISTORY OF THE NORWEGIAN WEALTH FUND

The Norwegian government first transferred capital to the fund in May 1996. But there is a long, fascinating story behind it because things are never as easy as they sound. We must acknowledge the financial discipline of the founding fathers and of the politicians and managers who took over.

The idea of a Norwegian oil fund was first conceived as Prime Minister Einar Gerhardsen and his government claimed sovereignty over the Norwegian continental shelf. This laid the grounds for the Norwegian approach to petroleum resource management, based on parliamentary guidelines for responsible and long-term management, ensuring strong government control.

The search for oil began in 1966. During the next four years, 37 wells were drilled without success. On the last attempt, the day before Christmas Eve 1969, it was announced that oil was found in the Ekofisk field. To date, Ekofisk is still the largest oil field ever found at sea. In the early ’70, the government went through many negotiations to set up the best structure, governance, and framework to manage these resources. A key document was known as “the White Paper”, or “the 10 Oil Commandments.”

Still, only in 1983 did a report promise the creation of a fund where the government could store the current temporary rush of oil revenue and spend only a small % of the real return without touching the principal. Seven years later, in 1990, the Norwegian parliament passed a law establishing the Government Petroleum Fund. The plan regularly transferred capital from the government’s petroleum revenue to the fund.

The fund aimed to support the government’s long-term petroleum revenue management. It was set up to give the government room for maneuver in fiscal policy should oil prices drop or the mainland economy contract. It also served as a tool to manage the financial challenges of an aging population and an expected drop in petroleum revenue. The fund was designed to be invested for the long term, but in a way that made it possible to draw on when required.

According to its fiscal rule, the government can spend a long-term average of 3% of the fund’s value annually. This amount is designed to be less than the expected total net annual return, not to drain the fund´s capital. Still, the 3% contributes up to 20% of the annual state budget.

From its first transfer of money in May 1996 to the end of 2023 (28 years), the fund received a net inflow total of 4,698 billion kroner (444 billion USD, being 15.8 billion USD per year), while the fund’s cumulative return was 8,592 billion kroner (813 billion USD). So, two-thirds of its value is returns on investment. Sweet! Commenting on this solid performance, Nicolai stated:

“we found oil twice: once in the continent shelf, and secondly in the capital market”!

While the fund’s website provides several tables and graphs, this Financial Times 2021 graph best represents the weight of Total Returns on the fund size (returns vs. inflow). 

Graph: Financial Times, 2021.

Graph: NBIM, 30/06/2024.

5) THE NORWEGIAN WEALTH FUND and GOVERNMENT SPENDING

The fund is not the only source of oil revenues for the government but – if well managed – is the most financially sustainable. Professor Halvor Mehlum from the economics department at the University of Oslo, back in 2022, explained to The Local (Norwegian Newspaper) the three government income streams from oil:

• Firstly, there is a surplus tax of  78 percent on all oil companies that operate in Norwegian waters.
• Secondly, the state earns dividends from government ownership in oil companies. The primary source of this income is from the 70 percent share it has in Equinor.
• Thirdly, the government earns money directly by owning drilling rights in Norway’s waters.

“The oil revenue goes to finance the government budget—all parts of it. There is no earmarking of oil money for certain sectors such as health, education, pensions, the police, and the army, for example. (…) “It amounts to more than 20 percent of the budget and about 10 percent of mainland GDP (which excludes GDP generated by offshore oil,” Professor Mehlum said.” 

The compound interests of the fund bring a sustainable income stream that tops up the state’s resources with extra cash. “Without this source of funds for the budget, the government would have to reduce spending drastically or increase taxes way beyond what is possible,” the economics professor explained. 

To keep the fund a long-term sustainable source of income, despite the limited nature of oil resources, requires optimal management of the fund itself, in terms of risk/returns management, but also in terms of withdrawals (outgoing money to fund the annual government budget). To prevent the government from depleting the fund’s reserves, a guideline limits the amount of oil revenue that can be spent each year.

“The government may use up to three percent of the fund annually, and any surplus flows back into the fund,” explains Professor Mehlum.

However, this cap is not legally mandated; rather, it functions as a flexible reference point. Even though it is not strictly binding, the government still aims to keep the oil-related portion of the budget within reasonable limits to satisfy both voters and the central bank.

“The public’s call for restraint stems from two worries,” the professor notes. “People want to secure their future and pensions—and ensure their children won’t be overburdened by taxes. They also fear that overspending could push up interest rates, which would severely affect them, given the heavy mortgages many carry.”

6) CAUSE OF ECONOMIC STAGNATION

Public overspending due to the windfall from oil revenues and the fund’s returns is something to watch closely. Landet som ble for rikt / the country that became too rich, a recent book by Martin Bech Holte, an ex-McKinsey partner, deeply analyses government public spending and budget allocation, ultimately blaming the Norway Oil Fund for a decade of economic stagnation!

In an interview with the Local, Martin states that the 2013 election marked the beginning of Norway’s decline in economic success—a trend that had held for two decades.

Public Spending – Who screams louder

“The Conservative Party won on a platform of increased public spending.” (…) “Ever since, both the left and right sides of the political spectrum have embraced the idea that the government should address challenges by allocating funds rather than tackling issues directly.” This has led to a “massive surge” in public spending, inefficiencies in the public sector, and substantial subsidies to businesses that are often uncompetitive.

Holte identifies a design flaw in one of Norway’s most noteworthy accomplishments: the oil fund. Spoiler alert: while he refers to the fund, based on his analysis, the real culprit would be the loose government rules on how to spend the fund´s windfall.

He acknowledges that establishing the fund in 1991 greatly protected the country from the “resource curse” often seen in other major oil-producing nations. As already discussed, petroleum revenues go to the Bank of Norway for investment rather than flowing directly into the national budget, and only a share of those investment returns is used to fund the national budget.

However, the original design left a crucial issue unresolved:

“there are no rules on what the petroleum money can be spent on. This means that voters know that politicians always have money to spend on their needs, which means that politics ends up being a battle about spending money on serving the needs of whoever screams highest. Voters know that politicians always have money to meet their demands, which turns politics into a contest over who can push loudest for government spending.”

What happened after 2013?

According to Bech Holte, Norway’s economic challenges in 2025 stem largely from the unravelling of a once-stable framework—something made possible by the country’s oil fund revenues.

Key elements that supported a strong economy have begun to reverse, he explains, pointing to a less neutral industrial policy and politically favoured projects.  Essentially, we’re paying people to be inactive instead of helping them participate.

He also criticises public projects for becoming “wildly expensive” due to loose budget constraints. He highlights how funds are being funnelled to businesses “that shouldn’t be kept afloat,” such as Morrow Batteries, a battery manufacturer.

This has had a significant effect on the economy. He notes that, in addition to slow growth, Norway experienced a decade of stagnant real wages, which is weak by international standards. The currency has lost half its value against the dollar and a quarter against the Swedish krona, reflecting broader confidence in the Norwegian economy.

Possible Solutions to the Government’s Public Spending

Bech Holte believes the solution lies in both parties agreeing on stricter rules for oil fund revenues. He suggests revisiting the 2001 parliamentary proposal, which outlined three key spending areas: incentives for work, infrastructure development, and investments in knowledge and education.

Since infrastructure and education are already well-funded in Norway, he argues that the majority of oil revenues—up to 90%—should now be directed toward creating employment incentives and promoting investment.

To achieve this, he proposes a bold tax reform that reduces labour income taxes to zero or even makes them negative for low-wage earners. He believes this approach would go beyond Sweden’s successful model, encouraging more people to join the formal workforce and boosting economic productivity.

 7) THE RETURNS OF THE NORWEGIAN WEALTH FUND

The fund seeks to achieve the highest possible long-term return with an acceptable risk. The fund has generated an annual return of 6.09 per cent between 1 January 1998 and the end of 2023. The net annual real return on the fund is 3.83 per cent.

We could immediately point out how the overall performance is not that outstanding. The management does not beat the market, the S&P500, with its total long-term average of around 9%.

However, as the fund clearly states, it has outperformed the benchmark index by [ONLY] 0.28 percentage points since 1998. How is this possible?

Well, the fund’s investments are measured against a benchmark index set by the Ministry of Finance based on indices from FTSE Group and Bloomberg Barclays Indices. The benchmark index comprises global equity and bond indices.

The equity portion of the benchmark index is based on the FTSE Global All Cap index and comprises 45 countries and 9,191 listed companies at the end of 2023. The fixed-income portion of the benchmark index is based on indices from Bloomberg Barclays indices and comprises 17,565 bonds from 2,398 issuers. Fixed-income investments are allocated 70 per cent to government and related institutions’ bonds and 30 per cent to corporate-sector securities. 

It is important to recall that, given its mission and size, the fund seeks returns through a relatively conservative, long-term approach. Looking at the most recent allocation, the funds invested 72% in equities, 26 % in fixed income, 1.8% in unlisted real estate, and 0.1% in renewable energy infrastructure.

The fund also has a strong social and environmental mission. For instance, to promote energy transition, the fund does not divest from oil and gas but rather applies pressure from within—as a shareholder—to support energy transition. 

All these factors quickly explain why the S&P500 would not be a reasonable benchmark for the fund.

If I had to take an example outside the Wealth Fund Industry, the NBIM long-term public investment approach reminds me of the asset allocation and investment philosophy of Yale’s Endowment, designed by David Swensen. With David, I first understood the power of investing long-term for institutions built to last for centuries, and that doesn’t necessarily look at quarterly results!

8) THE NORWEGIAN WEALTH FUND | A GOLDMINE  FOR FINANCIAL EDUCATION

It could be counterintuitive at first to realise that public investors have limited room for investment manoeuvring, not only because of their specific benchmark and risk appetite, but also because the “smaller pond” available is smaller than their volume of assets under management.

You and I can choose any investment or asset class and select the risk-reward that we feel like, the portfolio concentration, or even go wild and experiment, focusing on a specific geographic region, industry sector, or leading company. A public investor, specifically one with such an immense inflow, assets under management, and mandate, will ultimately struggle to allocate all its budget investments in line with long-term conservative guidelines while still trying to “beat” its benchmark. Given all these factors, in the words of the Norwegian Wealth Fund CEO,

“it is NOT what you are in; it is what you choose NOT to be in that really counts.” (Nicolai  Tangen, Ja-2024).

The funds, by design, invest in over 72 countries to achieve broad exposure to global growth and value creation and ensure risk diversification. The fund has a “small” stake in about 9,000 companies worldwide. On average, they hold 1.5 percent of the world’s listed companies: a fantastic footprint and achievement for a country with less than 6 million people.

Given the fund’s size and its rather conservative, long-term approach, we can now understand why Nicolai Tangen states that beating the benchmark by 0.1% is already great and by 0.5% is genius.

One question came to my mind, though. What would be the job of their investment analyst? Wouldn’t it be sufficient to buy a bunch of index ETFs? Of course not. NBIM staff sit on the boards of these companies and actively vote based on the fund’s mission. They vote on more than 120,000 resolutions yearly at more than 12,000 annual shareholder meetings. When needed, they de-invest or reduce their stake in companies that don’t meet their standards or long-term sustainable goals.

What is truly amazing about the fund is the possibility of accessing its reports and its investment exposure by country, investment type (Asset Classes), Sector, and Year. Check out every single investment, and even see how they voted at each company.

9) THE NORWEGIAN WEALTH FUND | LESSONS FOR THE RETAIL INVESTOR

Despite its long-term public investment model, I still believe there is a lot to learn for a retail investor like you and me:

• Make an automatic deposit of your revenues into an investment fund. Pay yourself first!
• Let the investment compound over time.
• Select a benchmark that suits you. Is it the composite of stock, bond, and real estate? Is it total US stock? Is it total World Stock?  What is the expected risk appetite? What is the expected total return?
• Diversify your investments based on your horizon and appetite. Look for an asset allocation among stocks, bonds, and real estate.
• Protect the principal. You can withdraw a small percentage of your returns to cover a percentage of your annual costs. However, don’t touch the principal: don’t kill the goose of the golden eggs!

TEST YOUR KNOWLEDGE ON THE NWF WITH A  KAHOOT! QUIZ

 BOTTOM LINE

It was only a few months ago that I discovered the NBIM website. Whenever I can, I dig deeper into its content. It is packed with fantastic information, from reports, data, tools, and videos. Its annual investment conference has great guests.

The NBIM CEO Nicolai Tangen podcast series in Good Company, featuring in-depth interviews with CEOs of some of the world’s largest companies, is truly inspiring and entertaining.

So, give it a try. You will love it and learn a lot, not only about the Norwegian Wealth Fund but also about how to set up a great investment plan.

If you like this introductory post on the Norwegian Wealth Fund, check out other Financial Wisdom in my Archive, YouTube videos, and Audio Podcasts.

Enjoy your financial journey. Sweat Your Assets!