This year will prove to be a watershed for the world’s largest sovereign wealth fund as, for the first time in two decades, Norway’s will have money taken out by the government in Oslo.

The withdrawals so far have been small compared with the size of the fund, which has grown rapidly to become one of the largest investors in the world on the back of surpluses made by Norway’s petroleum industry.

But as much as the issue is played down by Norwegian politicians and investment officials, the withdrawals matter as part of a debate about the future of the oil fund and how much risk it is willing to take on during a period when lower interest rates could hit future returns.

“This fund is meant to last generations and yet we are tapping it already — many, many years before we were meant to. If we keep on spending as we are and the fund can’t earn decent returns then we could end up eating into it,” says one of Norway’s leading businessman, who did not want to be named.

Espen Henriksen, associate professor at the BI Norwegian Business School, says the withdrawals should not be seen as too dramatic, however, which is a view shared by Oystein Olsen, Norway’s central bank governor.

The oil fund on Wednesday revealed NKr24bn ($3bn) had been withdrawn by the government in the second quarter following in the first. Another NKr40bn is expected to be taken out during the rest of the year against the fund’s assets valued at NKr7.35tn.  

But Prof Henriksen, who is advising the government on the oil fund, argues that two trends are moving against Norway that cause concern: low oil prices and lower expected rates of returns for investors. 

Falling oil prices — and higher government spending — are responsible for the current withdrawals. Norway’s government is allowed to spend up to 4 per cent of the fund each year in its budget.

Until this year, the amount of money taken from the fund has always been less than the amount of petroleum revenues put back by the government — resulting in an average annual inflow of about NKr210bn over the past decade.  

But the amount of oil and gas revenue — generated through a tax on production as well as dividends from state companies — has dropped sharply in recent months. 

The 4 per cent figure was set to reflect the oil fund’s expected rate of return. But many, including the central bank governor, doubt whether the oil fund can now achieve this with its current asset mix of 60 per cent equities, 37 per cent bonds, and 3 per cent property. The fund returned 1.3 per cent in the second quarter and just 0.6 per cent in the past year.

As a result, Mr Olsen has proposed reducing the amount the government can spend to 3 per cent or even lower.  

The government has appointed a — including Prof Henriksen — in January to look at whether the oil fund should invest more in equities to chase higher returns as bond yields languish. Its current holdings equate to about 1.3 per cent of every listed company in the world, making it one of the largest global equity investors.

Mr Olsen has suggested bonds need form no more than 20-25 per cent of the fund, with the rest filled by equities or tangible assets such as property or infrastructure.

Trond Grande, deputy chief executive, says: “The question is not really what should we do to reach 4 per cent but what is our risk appetite?”  

Mr Grande on Wednesday again underlined the fund’s nervousness over holding such a high share of bonds with almost a quarter of its fixed income portfolio now trading at rates below zero.  

“We have seen decades of falling rates and that has given bond investors a capital gain. There is a question mark over how much further rates can fall and if you can expect to have that kind of capital gains in the future,” he added.  

Increasing the equity portion is not without risks, however. The fund lost almost a quarter of its value in 2008 and officials worry about how the Norwegian public — the fund’s ultimate owners — would handle an even bigger fall.

Questions also exist about how the fund itself operates. Its inflows have been so large that it was able to rebalance its portfolio in the past without the forced selling that other institutional investors can be pushed into. For instance, it cut exposure to Europe from 60 per cent to 40 per cent in its fixed income portfolio by using new cash to buy emerging markets bonds rather than selling existing assets.  

Thus far, the fund says it can cope with the withdrawals through cash flow it receives from dividends and bond coupons, which last year reached NKr191.5bn.  

But after increasing rapidly in size over the past decade, some — including the central bank governor — now think the fund may be as big as it is going to get. “The fund may be close to a peak,” Mr Olsen told the FT earlier this year.  

That raises the pressure on politicians not to take too much out of the fund. “This has long been the question: will the money burn a hole in politicians’ pockets? So far so good, you have to say, but the desire to spend may get bigger,” says the businessman.  

If the oil fund has peaked in size, it will have to face some of the more difficult questions sooner. But Prof Henriksen says the fund has already done its job to an extent by making Norway richer and more diversified by converting oil wealth into financial assets. “It is definitely better to have this fund than not to have the fund,” he adds.