News: SOL Norway sovereign fund excludes three more firms from portfolio, page-25

"when you say add 10%
are you saying the ROE should be 16% instead
of 6%, or are you saying 6.6%?"


Instead of the annual ROEs for the past 10 yrs up until 2018/07 being:

8.5 6.5 5.7 6.0 6.1 3.9 6.1 6.6 7.9 10.5


the ROE history should be:

18.5 16.5 15.7 16.0 16.1 13.9 16.1 16.6 17.9 20.5



If you can't understand why this is the case, then imagine the simple example in which you are the sole shareholder in a company into which you inject $1.0m of your capital (i.e., your equity), which then gets invested in a portfolio of stocks, which are held for the long-term and which pays around $50,000 pa in dividends (i.e., a 5% dividend yield).

In each year, your company's P&L income would only reflect income of $50,000.

But the value of the portfolio of stocks your company owned would be 10% (i.e., $100,000 ) higher.

By how much has your wealth gone up in that year?

Answer: $50,000 + $100,000 = $150,000;

i.e., a 15% Return on your $1.0m of Equity Capital.

That's what is happening at SOL: the P&L only shows the income component of the investment returns being generated, and not the increase in the capital value of the investments being held because capital gains are not recorded as income until the investments are sold.


Viewed yet another way: if SOL had to - for some reason - sell out of all its investments in one particular year, the resulting capital gain which now would appear in the P&L in that year would be of such a magnitude that the ROE would suddenly be a great many hundreds, or even thousands, of percent. And that very large ROE in the one single year would be a reflection of the deferred capital gains from all the many preceding years (decades, actually).

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