* Oil fund sees positive development continuing in Q3

* Signals end of ramp up in emerging market allocation

* Says reached planned 60 pct equity allocation in Q2

* Says liquidity starting to return to fixed income markets

* Launches initiative for “green” shareholder activism

(Combines stories, adds details)

By Wojciech Moskwa and Joergen Frich

OSLO, Aug 14 (Reuters) - Norway’s $397 billion sovereign wealth fund said on Friday it now owns 1 percent of the world’s stocks and signalled the end of its emerging markets asset ramp up after posting its best ever quarterly results for April-June.

Buoyed by a broad financial market rally from the depths of the global downturn, Norway’s oil fund posted a 12.7 percent return on its investment, or a $45 billion gain -- its biggest quarterly gain in relative and absolute terms.

Europe’s biggest owner of stocks also launched an initiative aimed at fostering dialogue on environmental issues with firms in its portfolio, a blueprint for green activism by often passive institutional investors. [ID:nLD26718]

Including inflows from oil and gas revenues, the fund grew 14.9 percent in the three months to end June to reach 2.385 trillion crowns ($396.6 billion), in line with preliminary figures. Since June, the fund has swelled above 2.5 trillion.

“Economic developments showed clear signs of stabilising in the second quarter and the uncertainty over the financial sector decreased,” the fund’s executive director Yngve Slyngstad said.

“The positive development has continued into the third quarter,” he told a quarterly news conference.

The Government Pension Fund -- Global, commonly known as the “oil fund”, invests Norway’s energy revenues in foreign stocks and bonds to save for future generations.

Norway, whose prudent oil wealth management has helped the resource rich country avoid overheating and high inflation, has 4.8 million people, less than 0.1 percent of global population.

The world’s second largest sovereign wealth fund after that of the United Arab Emirates has tilted its global investment profile towards Europe to better reflect Norway’s trade flows.

It owns 1.7 percent of all listed European companies, compared to 1 percent of global stocks. It also owns 0.7 percent of European bonds and 0.4 percent of bonds in the Americas.

EQUAL WEIGHT IN EMERGING MARKETS?

Slyngstad signalled that the fund’s year-long ramp up in asset allocation to emerging markets was over as its proportional holdings in developing markets reaching par with those in developed markets.

“We have a weight in the emerging markets that is proportionally identical with the developed markets,” he told Reuters when asked if the fund had reached its desired level of emerging markets exposure.

“This is a level (of emerging market exposure) which is set by the finance ministry, and we have so far not sent a request with a proposal to increase this amount,” said Slyngstad, who rarely gives forward looking forecasts or comments.

Bouncing back from its worst performance in its 10-year investment history in 2008, the fund outperformed its benchmark by 2.1 percentage points during the second quarter.

Slyngstad said the fund had also completed a two-year drive to raise its equity allocation to 60 percent of total assets from 40 percent, at the cost of lower bond holdings.

Because the fund bought a larger than normal amount of equities during the downturn, its share of global stocks has more than doubled over the past year, Slyngstad said.

“Since the markets turned in March and up until today, the value of the fund has increased by more than 600 billion crowns,” he said, adding that liquidity was “beginning to return” to a number of fixed income markets.

The fund was badly burnt on U.S. securitised debt last year, triggering a formal government review of procedures and changes in the way it actively manages assets, including a sharp reduction in the number of external managers it hires.

The fund's biggest equity holdings include near $3 billion stakes in oil major Royal Dutch Shell RDSa.L, food group Nestle NESN.VX and banking group HSBC HSBA.L. It owns about $13 billion worth of both British and U.S. state debt and $7 billion in notes from U.S. mortgage lender Fannie Mae FNM.N.