Hello and Happy Sunday! What would you do with an unexpected windfall? Would you spend it all in a spectacular splurge, or stash it in a savings account straight away?

A similar question fell to the government of Norway some 60 years ago, after finding the oil equivalent of a lottery ticket in the North Sea — a discovery that formed the foundation of what is now one of the world's largest, and most influential, wealth funds.

Norway's conclusion to the question in the introduction of today's newsletter — to funnel some of this rush of oil revenue into a sovereign wealth fund — has little competition on the list of “best financial decisions of all time”, as the fund’s assets have ballooned to over $1.4 trillion. That puts Norway's sovereign fund at a similar size to that of China's — yes, the same China that has more than 260x as many people as Norway has.

‍A sea of money

‍In 1963, Norway’s government declared sovereignty over the Norwegian Continental Shelf — an area of the world that, until the late 1950s, most states had overlooked as a potentially rich source of oil.

When drilling started just a few years later, Norway found itself awash with black gold and the government immediately began debating how to ensure fiscal flexibility should petroleum prices falter, its economy crumble, or oil supplies eventually run dry.

To guarantee that its current and future citizens would benefit from this new-found wealth, the state wanted to use the money to invest in the long-term while making sure it could be drawn on “when required” — thus establishing the Government Petroleum Fund in 1990. In 1996, the first cash was transferred into the Petroleum Fund — or the Government Pension Fund of Norway, as it later became known.

Golden gås

‍By the end of 1998, the pot had amassed just shy of 172 billion kroner, or $23 billion. However, since then, the fund has grown exponentially as the oil money was poured into a smörgåsbord of investments, from real estate and government bonds to equity investments in thousands of companies.

Returns on those wide-ranging investments — which now make up the bulk of the fund, with less than a third of the total coming from government inflows — have seen the fund's value rise to world-influencing levels, with $1.02 trillion tied up in global equity investments.

It’s hard to wrap your head around what one trillion dollars worth of stock market investment actually looks like. To put it into perspective: Norway, with just ~0.07% of the world’s population, owns a staggering 1.5% of the global stock market through investments in more than 9,000 listed companies across 70 countries.

The Oslo portfolio

Because of its size, Norway’s fund looks a lot like a diversified market index, with considerable slices of every major sector. After a record $164 billion loss last year, as inflation and geopolitical tensions shook the wider market, Norway’s tech holdings, helped the fund return 10% in the first part of this year, with AI-driven rebounds for companies like Meta and Microsoft propelling the pot’s $143 billion bounce-back.

Interestingly, just ~4% of the fund is tied up in energy stocks — a modest underweighting compared to many global markets, perhaps because the country is already substantially exposed to the oil sector.

Indeed, Norway’s fund is increasingly setting investment policies that encourage companies to reduce, or at least disclose more transparently, their carbon emissions. The irony (or hypocrisy) of an oil-backed fund setting the pace on corporate environmental policy is not lost on many, even as Norway continues to lead the world on green initiatives, like electric vehicle adoption.

Oilfluence

Oil exports have played a huge role in developing Norway’s robust welfare state, as well as evening out inequality and generally improving the standard of state institutions. Indeed, according to the NBIM, the Pension Fund accounts for 20% of the Norwegian government’s budget, and is worth $250k+ for each Norwegian citizen at the time of writing — helping Norway to become one of the most prosperous nations on the planet.

Norse code

‍The Human Development Index (HDI), devised by the United Nations Development Programme, is a summary measure that ranks countries based on key standards of living. Data from 2021 placed Norway in 2nd, with an HDI of 0.961, with Norwegians enjoying some of the longest lives (life expectancy at birth of 83.2 years), average schooling of 13.0 years, and a Gross National Income (GNI) per capita of ~$65k.

Norway’s 2021 HDI is some 12.8% higher than when the report began in 1990. Back then, GNI for Norwegians was nearly half what it is now — only $36,063 per capita, adjusted for inflation — coincidentally aligning with the creation of the Pension Fund.

Scandinavian success

‍Norway’s Scandinavian neighbors rank similarly highly. The annual World Happiness Report has named Finland the happiest country in the world for the past 6 years, and it’s only ever missed out to Norway, Denmark, or Switzerland for the spot since the report began. Interestingly, Finland has almost no known fossil fuel resources, suggesting that Norway’s development is perhaps less to do with oil, and more to do with broader Scandinavian ideals, with terms like ‘koselig’ (Norwegian) and ‘hygge’ (Danish) having been exported globally, as the benefits of the snug, nature-filled culture adopted by many Scandis purportedly plays a part in their general happiness and health.

‍Late bloomer

‍Having forayed into oil relatively late, few could have predicted the massive impact that the booming industry would have on the country’s economy. Today, Norway ranks as the 10th largest exporter of oil, and the country supplies up to 25% of the EU’s gas demand.

‍Norway now grapples with a conundrum in many of its domestic political issues — if you have $250k+ in a pot for every single man, woman and child in your entire country, how do you spend it? That’s a problem most would love to have — which is why more and more countries are setting up their own versions, with the Philippines' launching one in July.

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