(Adds deputy CEO interview, detail)
OSLO, April 21 (Reuters) - Norway's sovereign wealth fund, the world's largest, reported on Thursday its weakest quarter in two years as inflation and the Ukraine crisis hit both stock and bond valuations.
The $1.3 trillion fund posted a January-March loss of 653 billion Norwegian crowns ($74.2 billion), a negative investment return of 4.9%, which was still 0.66 percentage points better than the return on the fund's benchmark index.
It was the fund's weakest quarter since losing $114 billion in the first three months of 2020 when the COVID pandemic first hit markets.
The fund quickly rebounded from that, however, and in 2021 posted its second-best year on record. But the outlook remains uncertain, said deputy CEO Trond Grande of Norges Bank Investment Management, which operates the fund.
"It is maybe a bit surprising that the markets, especially the stock markets, haven't reacted more on the fact that we now have a war on European soil," Grande told Reuters.
"We should be prepared that it could stay uncertain, and the most important thing then is that we have a long-term investment strategy that can withstand short-term swings," he said.
In addition to Russia's invasion of Ukraine, global markets also took a hit from a rise in COVID-19 infections led by the Omicron variant in the quarter, as well as a surge in inflation that drove down the value of government bonds.
The value of the fund's Russian assets plunged almost 90% to 2.9 billion Norwegian crowns in the first three months of the year, Grande said, in line with the company's earlier assesment.
In total, 70.9% of the fund was invested in equities at the end of March, while 26.3% was invested in fixed income, 2.7% in unlisted real estate and 0.1% in unlisted renewable energy infrastructure.
Founded in 1996, the fund invests revenue from Norway's oil and gas sector and holds stakes in some 9,300 companies globally, owning 1.3% of all listed stocks.
The fund holds the equivalent of $240,000 for every Norwegian man, woman and child.
($1 = 8.8006 Norwegian crowns)
(Reporting by Victoria Klesty and Karlotta Weber Editing by Terje Solsvik and Mark Potter)