OSLO: Norway's $860 billion sovereign wealth fund was weighed down by poorly performing European

investments in 2014 and will increase real estate holdings and again sell European bonds this year, it said on Friday.

The fund returned 7.6 percent last year, 0.8 percentage point below its internal benchmark based on global markets, as rock bottom bond yields, poor growth prospects and increasing geopolitical tensions in parts of Europe cut into returns.

With low oil prices sharply reducing fresh inflow from the government, the fund will prioritise real estate after spending 2014 shifting its Europe-focused portfolio towards US and Asian assets.

"We are not enthusiastic about investing in European government bonds," Yngve Slyngstad, the fund's chief executive told Reuters.

"This year it may be that we are using more than the inflow in real estate investment, so as such, yes, we'll be selling other assets... European government bonds."

The fund, which holds $166,000 for each of Norway's 5.1 million people, owns 1.3 percent of all global equities and invests Norway's oil and gas wealth.

Although it is expected to exceed $1 trillion by the end of the decade, its growth will slow sharply after crude price nearly halved over the past year, limiting the government's income from its massive offshore sector, which generates s fifth of GDP.

Another hurdle for the fund will be diminishing return prospects, which makes the government's long term 4 percent real return target difficult to reach.

"Four percent may be too optimistic for the future... there are solid reasons we end up with a lower estimate," said Oeystein Olsen, governor at the central bank, which manages the fund.

Over the past year, the fund raised its exposure to North America to 38.9 percent of the fund from 35.2 percent a year earlier while its European holdings dropped to 39.3 percent from 44.8 percent.

The fund has only modest exposure to Europe's periphery, like Greece. Its holdings in Russia have been stable as buying is not a preferred option while selling is difficult due to a lack of demand, Slyngstad said.

The fund's bond holdings fell to 36.5 percent of its portfolio from 37.3 percent three months earlier, while equity holdings fell to 61.3 percent of the fund from 61.4 percent. Its real estate holdings meanwhile jumped to 2.2 percent from 1.3 percent.