World’s largest wealth fund warns ‘permanent’ inflation will hurt returns


The world’s largest sovereign wealth fund has warned that investors face years of low returns as soaring inflation becomes a permanent feature of the global economy.

Nicolai Tangen, managing director of Norway’s $1.3 billion oil fund, told the Financial Times he was “the team leader of the permanent team” in the fierce debate over whether the rise rates is transient or a lasting threat.

Consumer price inflation is at its highest level in more than two decades in the world’s major industrial economies, particularly in the United States, where the annual pace of price growth reached 7% in December, compared to only 0.1% in May 2020.

Tangen said the oil fund, which owns the equivalent of 1.5% of all listed companies globally, believed inflation “could be higher than generally expected” as the world is experiencing both strong demand and ongoing supply chain disruptions.

“We see it everywhere, in more and more places. You’ve seen Ikea increase prices by 9%, you’ve seen food prices increase, freight rates, trucking rates, metals, raw materials, energy, gas still very high. . . We also see signs on salaries.

The former hedge fund manager said: “How is this going to play out? It’s hitting bonds and stocks at the same time… for the next few years it will hit both.

Economists are divided on whether the surge in inflation is short-lived. Some say the pandemic has caused a temporary shock to supply chains that has coincided with a strong economic recovery, which will fade over time.

Market measures of inflation expectations suggest that investors are not overly concerned about runaway inflation. A popular indicator, the 10-year equilibrium rate, shows inflation moderating from current levels to about 2.5%. The two-year measure indicates that inflation will remain just above 3% in the short term.

But Tangen said other factors, including more people retiring or quitting their jobs, have bolstered his view that the increases are permanent.

Bonds and equities have started 2022 on a high note, and investors’ longer-term expectations for traditional capital markets are getting darker.

AQR Capital Management, a quantitative investment group, estimates that a typical balanced portfolio of 60% stocks and 40% bonds will only return 2% per year after inflation for the next five to 10 years. This is less than half of the average of about 5% recorded over the past century.

Large investors have sought to bolster returns with so-called “alternative” investment strategies, including hedge funds, venture capital and real estate. Their assets under management reached $13.3 billion last year, according to data provider Preqin, which forecasts that assets in the alternative investment industry will reach $23.2 billion by the end of 2026. .

The mandate of the oil fund, hosted by the central bank of Norway, includes only stocks, bonds and real estate. It had its fourth best year for returns last year, posting a 14.5% increase. It has been growing steadily since the global financial crisis of 2008, but Tangen warned that could be coming to an end.

“We will have much more difficult times ahead. . . with extremely low interest rates and a very high stock market, and with rising – and in some places accelerating – inflation, we could see a long period of low returns,” he said. .

Historically, the fund has “outperformed in bull markets and underperformed in bear markets,” he said. However, the former founder of London-based hedge fund AKO Capital, who took over the oil fund in September 2020, aims to change that through “lots of small tweaks”, including employing forensic accountants to help find companies to underweight in its portfolio.

Additional reporting by Colby Smith in New York


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