The cuts in equity holdings hit both its domestic and international stock holdings. The fund’s allocation now sits at 8 per cent domestic equities, 15 per cent foreign equities, 50 per cent domestic fixed income, 12 per cent foreign fixed income, 10 per cent alternatives and 5 per cent cash.

Under Icelandic law, a fund’s ceiling for equities is 60 per cent of the portfolio and 10 per cent for alternatives. Direct real estate investments are not allowed.

According to Kari Karason, managing director of the fund, the moves were made in reaction to the current economic difficulties in both Iceland and the rest of the world.

He said: “We have increased our allocation to bonds because of interest rates. I think it’s a window that will not be there for long. We are seeing the economy now responding to the global credit crunch.”

Last week, the Central Bank of Iceland chose to hold rates at 13.75 per cent, the second highest in the OECD countries, next to Turkey.

Mr Karason also indicated that the fund could increase its cash exposure.

Commenting on the fund’s outlook for 2008, he said: “2008 will be a tough year in terms of asset management in Iceland and everywhere else. Are we going to have a hard landing? Maybe. I still think it’s unlikely.

“The positive thing is that there is much foreign investment and the state doesn’t owe money, so it can support the economy. It all depends on how deep the troubles abroad are going to be.”

SA

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