Simplification of the benchmark index for the Government Pension Fund Global

Emerging market equity sub-index

As part of a comprehensive review of the equity benchmark composition, the Government has assessed the framework and sub-index for emerging market equity investments.

The Fund’s equity benchmark is based on a broad global index from the index provider FTSE Russell. The index has been expanded over time as the index provider has included new markets.

The Government proposes that no additional markets are to be added to the GPFG equity benchmark at the present time. This implies that any new emerging markets that the index provider might decide to include in its indices not automatically will be included in the Fund benchmark index.

– The Fund’s equity benchmark currently contains a considerable number of markets, including all major economies. Including additional and generally small emerging markets is not assumed to contribute to  improvement of the benchmark risk-return, says Minister of Finance Jan Tore Sanner (Conservative Party).

The management mandate for the GPFG requires Norges Bank to approve all markets in which the fund capital is to be invested. This applies also for markets that make up the benchmark index set by the Ministry of Finance. The Ministry will, based on the recommendations of the Ethics Committee, be clarifying the mandate provisions on risk assessment and reporting in the context of the Bank’s approval of markets.

The number of companies in the equity benchmark

The number of markets and companies included in the GPFG equity benchmark has increased significantly over time. The benchmark currently comprises about 8,800 companies across 24 developed and 22 emerging markets. 

In the white paper, the Government proposes that the number of companies in the GPFG equity benchmark be reduced by omitting the 25–30 percent smallest companies from the benchmark. Such a modification will involve reducing the number of equity benchmark constituents by about 2,200 companies.

– Including a large number of companies and markets in the benchmark increases  complexity, and may add to costs. It may also make it more challenging to maintain the role as a responsible investor, says the Minister of Finance.

The smallest index companies account only for a very small proportion of the overall market value of the equity benchmark. This may be illustrated by the fact that a quarter of the number of companies accounts for no more than two percent of the aggregate benchmark market value. Consequently, the diversification gains from the very smallest companies are limited. Moreover, the costs of trading in small company stocks are higher than that of large companies.

The Ministry observes that less information is available on small companies than on large companies, and that the Council on Ethics has commented that a reduction in the number of companies in the Fund would have a positive effect on its efforts.