Lessons From 1 of the World's Largest Sovereign Wealth Funds

Norway’s government pension fund is considered to be one of the best-managed funds in the world. It's largest holdings are Royal Dutch Shell, BG Group, BP, and ExxonMobil.

May 29, 2014 at 11:02AM

Norway's sovereign wealth fund is one of the largest wealth funds in the world and also considered to be one of the best managed, hardly feeling any effect of the financial crisis.

Can private investors learn anything from this sovereign behemoth?

Norway's Government Pension Fund was set up in 1990 as a fiscal policy tool to support the long-term management of Norway's petroleum revenue. The fund today is estimated to be worth $860 billion; it is growing every single day and the wealth is technically public. The fund own 1.3% of all listed companies and returned a staggering 15.9% during 2013, its best performance ever and a total gain of roughly $120 billion.

It's difficult to establish a complete picture of the fund's holdings, but data from 2012 shows that its top 10 holdings included energy majors Royal Dutch Shell (NYSE:RDS-B), BG Group (NASDAQOTH:BRGYY), BP, and ExxonMobil.

Slow and steady
Royal Dutch Shell was the fund's top equity holding as of 2012. I can speculate that its No. 1 position was connected to the company's illustrious dividend history.

Shell has paid and increased its hefty dividend yield, which today stands at 4%, every year since the end of World War II, an accomplishment few other companies can claim.

However, Shell has come under pressure during the last few quarters as it struggles with falling refining margins and returns from its North American investments. First-quarter profit fell 45% year over year to $4.5 billion, mostly because the company had to write down the value of several Asian refineries. Still, even after stripping out these costs, Shell's profit fell 3% year over year. The company's refining arm posted the largest fall in profit, 14.6%.

Like its peers, Shell is also grappling with falling upstream production. Upstream production dropped by 9% during the first quarter due to maintenance and natural field decline.

In an effort to reverse this poor performance, Shell is shedding underperforming assets and switching equipment supplies to push down costs and increase return on investment. This change will take time, but as the company's 4% yield is covered nearly four times by cash generated from operations, investors will get paid to wait for this turnaround.

Relatively unknown
The wealth fund's No. 2 oil-sector equity holding during 2012 was BG Group, which is relatively unknown within the U.S. However, BG is a big player in the liquefied natural gas market.

BG is also something of a turnaround story. The company reported a 13% drop in first-quarter profit and is embarking on a program of asset divestment to drive growth from its portfolio.

Unfortunately, the company also faces headwinds within Egypt, where roughly 20% of BG's total production originates. Still, BG's exposure to the LNG market is attractive, and its production is expected to surge in coming years as two multibillion-dollar oil and gas projects within Australia and Brazil come online. Furthermore, there has been some speculation that BG could become the target of an opportunistic takeover attempt by resource giant BHP Billiton.

Should investors follow the fund's holdings?
With a dividend yield of above 4%, Shell is a great pick for any portfolio, but BG is harder to quantify. The company's underlying business is struggling, although divesting assets should assist BG's efforts to turn things around. What's more, BG's place in the world of LNG is second to none, and the company should profit as the LNG market expands.

Foolish summary
It would seem investors can learn something from the world's largest sovereign wealth fund: select stable, dividend-paying stocks like Royal Dutch Shell as a backbone for any portfolio. 

Shell remains a great pick for this purpose, as the company's payout is well covered and asset sales should power its return to growth. 

Why did Warren Buffett buy nearly 9 million shares of this energy company?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!


Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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