UPDATE 1-Norway fund dumps holdings from Europe's trouble spots

Fri May 4, 2012 6:51am EDT

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OSLO May 4 (Reuters) - Norway's $600 billion sovereign wealth fund walked away from Europe's struggling economies in the first quarter, dumping much of its holdings in battered euro zone government bonds.

The fund sold holdings of Portuguese and Irish government bonds in the quarter, and reduced its investments in government debt from countries including Italy and Spain, it said. Instead it bought bonds issued in local currencies in emerging markets such as Brazil, Mexico and India.

The fund's performance was also helped by rising stock markets during the three months.

"Predictability is important for a long-term investor and the euro area faces considerable structural and monetary challenges," said Yngve Slyngstad, chief executive of the fund, which invests Norway's tax revenues from oil and gas activities.

Slyngstad told reporters the fund would allocate a bigger part of its investments to the Middle East in future, a region where its presence is limited.

The fund took part in the Greek government bond exchange as part of the country's rescue even though it had opposed the terms as unfair.

The fund said it had exchanged its Greek government bonds for new bonds issued by the Greek government, and the European financial stability facility (the EFSF), as part of the restructuring of Greece's debt.

It had voted against Greece's bond restructuring - the largest in history - because the fund opposed special treatment given to the European Central Bank and wanted bondholders to be treated equally.

The central bank-run fund, also known as the "oil fund", earned a return on investment of 7.1 percent in the first quarter, 0.3 percentage points above its benchmark portfolio.

The fund is Europe's biggest equity investor and the value of its equity holdings rose between Dec. 31 and March 31 to 60.7 percent of the total value of the fund, from 58.7 percent.

But 70 percent of the inflow of 60 billion Norwegian crowns ($10.45 billion) of oil revenue during the quarter was invested in fixed income and the remaining 30 percent in stocks.

"The fund generally invests its capital inflows in the worst performing asset class," the bank said, referring to a strategy of buying assets when they look cheap.

Its equity holdings returned 11 percent in the quarter. The fund has about half of its equity investments in European stocks.

The value of the fund stood at 3.496 trillion Norwegian crowns ($609.14 billion) on March 31, up from 3.312 trillion at the end of December.

Measured in crowns, the quarterly return was the third largest since the fund's inception, it said.

"Stock markets in the U.S., Europe and Asia moved up in lockstep in the quarter, driving the fund's return," Slyngstad said.

($1 = 5.7393 Norwegian crowns) (Reporting by Victoria Klesty and Henrik Stolen. Editing by Jane Merriman)

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