AI Wave Boosts Returns for Norway’s $1.4 Trillion Fund

Norway’s $1.4 trillion sovereign wealth fund returned 10%, or $143 billion, in the first half as demand for artificial intelligence and semiconductor components saw technology stocks rebound.

(Bloomberg) — Norway’s $1.4 trillion sovereign wealth fund returned 10%, or $143 billion, in the first half as demand for artificial intelligence and semiconductor components saw technology stocks rebound.

A return of 38.6% in tech company shares drove a 13.7% return in the equity portfolio, with chipmakers and the biggest internet and software firms benefiting from a surge in interest in AI solutions, the manager of Norway’s oil and gas riches said in a report on Tuesday. Fixed-income investments returned 2.3%, while unlisted real estate holdings were down 4.6%. The fund’s report was set to be released Wednesday.

In a statement Wednesday, Chief Executive Officer Nicolai Tangen lauded the stock market as “very strong in the first half of the year, following a weak year in 2022,” adding that “especially technology stocks have seen significant growth, largely driven by the increased demand for new solutions in artificial intelligence.”

Created in the 1990s to invest Norway’s oil and gas revenues abroad, the fund — also known as Norges Bank Investment Management — is the world’s biggest single owner of equities, largely tracking a benchmark index based on a framework handed down by parliament.

The Oslo-based fund underperformed against its benchmark by 0.23 percentage point as it navigated the wobbly investment environment in the first part of the year, with misses in unlisted real estate and renewable energy infrastructure weighing on performance. 

Fast inflation and central bank campaigns to tame price increases coincided with banking industry tumult in the US and Europe, denting the fund’s investments in a US office sector suffering from soaring borrowing costs and falling values.

The fund also took a hit on the collapse of SVB Financial Group’s Silicon Valley Bank, prompting Tangen to tell lawmakers in April that he was focused on minimizing exposure to so-called rotten apples going forward. He’s also repeatedly warned that borrowing costs and soaring inflation are likely to weigh on returns in the years to come.

Speaking in an interview in Arendal, Norway on Wednesday, Tangen warned that the outlook for inflation is still unclear.

“We saw in the seventies that it actually did re-accelerate,” the executive said. “The link between climate and inflation is stronger than it’s been and you have some new elements there, which are worse.”

With Apple Inc, Microsoft Corp and Alphabet Inc among its biggest stock holdings, the fund has reaped the rewards of advances in artificial intelligence, and on Tuesday urged boards and companies to get serious about how they handle the threats and opportunities provided by the technology.

Read More: Norway’s $1.4 Trillion Wealth Fund Begins Charting AI Risks

Companies will need to develop AI expertise at the board level and should be able to explain how systems are designed and trained, the fund said in a view paper published Tuesday. 

Global regulation will be key to protecting against the risks of AI and for “long-term value creation,” it said, but companies have to be proactive in managing threats, while “systems that can pose particularly severe risks to people, society or business outcomes should be subject to additional controls.”

NBIM is also increasingly using its muscle to take a stronger stance against companies that fail to prioritize action on climate change, gender balance and executive pay. It voted on over 94,000 shareholder proposals in the first half and held 1,675 company meetings. About one in ten CEO pay packages were opposed by the fund and it voted against boards on 5% of proposals.

Read More: Norway’s $1.4 Trillion Wealth Fund Wants ESG Ratings Overhauled

Equities made up about 71% of the value of the fund, fixed income about 26% and unlisted real estate 2.3%, while unlisted renewable energy infrastructure made up 0.1%, it said. The government deposited 389 billion kroner ($37 billion) into the fund in the six months through June.

Its largest bond holdings were in US Treasuries, followed by Japanese and German government bonds.

The expected shortfall for the fund, which gauges the expected loss of a portfolio in extreme market situations, dropped to 1.04 percentage points from 1.22 percentage points at the end of 2022. The credit quality of the bond portfolio was virtually unchanged compared to year-end.

More than 80 “unwanted operational events” were registered in the first half, losing the fund about 1.1 billion kroner. Most of this loss was associated with a single mistake caused by the incorrect data being used, NBIM said.

(Updates with CEO comment in eighth and ninth paragraph, voting in 13th.)

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