* Oil fund should raise equity investments to 75 pct
* Current equity allocation is 60 pct
* Central bank says increase aimed at boosting returns
* Final decision expected next year
(Adds deputy governor quotes, background)
By Joachim Dagenborg
OSLO, Dec 1 Norway's sovereign wealth fund, the
world's largest, should raise the proportion of its investments
in equities to 75 percent from 60 percent to boost returns, the
central bank, which manages the fund, recommended on Thursday.
"A higher equity allocation means that the expected return
on the fund will increase," central bank Deputy Governor Egil
Matsen said in a speech.
A majority of members on a government-appointed commission
last month recommended an increase of equities to 70 percent,
although the group's chairman dissented, saying the holding
should instead be cut to 50 percent to reduce volatility.
"The realised return ... may differ considerably from
expectations. In order to maintain the investment strategy over
time, a good understanding and broad acceptance of this risk are
essential," deputy governor Matsen said.
Made up of revenues from Norway's extensive oil and gas
industry, the rainy-day fund began saving cash in 1996 to
preserve wealth for future generations and protect the country's
economy from short-term swings in the oil market.
The increased equity holding would boost the expected
30-year return of the fund to 3.0 percent per year from the 2.6
percent which was estimated if the equity allocation remained at
60 percent, said the central bank.
On a 10-year basis the expected return would rise to 2.5
percent per year from 2.1 percent, it added.
The recommendation will now be sent to Norway's Finance
Ministry, which is expected to publish a white paper on the
fund's strategy in the spring and to seek the consent of
If a change was made today, it would mean the world's
largest sovereign wealth fund, currently valued at $862 billion,
would move about $129 billion into equities away from
government bonds, whose low interest rates drag down the fund's
But any reallocation of the fund's assets is expected to
take several years.
Valued at more than twice Norway's annual gross domestic
product, governments are only allowed to spend an average 4
percent of the fund each year under the so-called fiscal
spending rule, and this may be tightened even more.
"Oil revenue spending should be based on a realistic
estimate of expected return. At the same time, due consideration
must be given to return uncertainty. It may therefore be wise
to consider spending somewhat less than the expected return over
time," Matsen said.
The fund can currently invest 60 percent of its assets in
equities, 35 percent in fixed income and 5 percent in real
estate. It holds stakes in around 9,000 companies across 78
countries. It cannot invest in Norway.
(Writing by Terje Solsvik and Stine Jacobsen; Editing by