Report on the management of the Government Pension Fund in 2009

"Strong performance in 2009 shows that the Government Pension Fund has fared well through the financial crisis. Key in this respect is a strong adherence to the long-term investment strategy of the fund", says Minister of Finance Sigbjørn Johnsen.

Today, the Government presented the report to the Storting on the management of the Government Pension Fund in 2009.

“A high degree of transparency and public debate about the long-term investment strategy are important for our fund”, says Minister of Finance Sigbjørn Johnsen.
 
The fund’s total market value rose by 394 billion kroner to 2 757 billion kroner in 2009. Of this, capital transfers to the fund amounted to 169 billion kroner, and the return on the fund’s investments to 642 billion kroner. While a stronger krone reduced the value measured in kroner by 418 billion, this does not impact the fund’s international purchasing power. The return on investments in the Government Pension Fund Global was 25.6 per cent in 2009, 4.1 percentage points higher than the return on the fund’s benchmark portfolio, whereas the return on investments in the Government Pension Fund Norway was 33.5 per cent, 2.2 percentage points lower than on its benchmark portfolio.

“The financial crisis had a significant impact on the Government Pension Fund. However, the losses from 2008 were to a large extent recovered in 2009, faster than many had expected. We have seen how volatile financial markets can be, but this is volatility we can live with, because the fund does not have specific liabilities requiring it to sell assets when prices are low. An alternative investment strategy aiming to minimise return variability would imply significantly lower expected returns”, says Johnsen.

“The last years’ market developments underline that sticking to the long-term investment strategy over time is a prerequisite for harvesting risk premia. Another lesson learnt is the importance of continuously developing the methods used to identify, manage and communicate the relevant risk factors for the fund”, says the Minister of Finance.

Better regulation of active investment management
The Government has evaluated the framework for and the practice of active investment management in the Government Pension Fund Global. This evaluation has been conducted in a broad and open manner, based on expert advice from academic and professional parts of the international finance community, and advice from Norges Bank (the Central Bank) itself.

“In our opinion there still ought to be some leeway for the fund to deviate from its benchmark portfolio. The costs involved in closely replicating the benchmark portfolio are unnecessarily high. Moreover, the fund’s characteristics create a potential for excess returns that should be exploited to some extent. Finally, there are synergies between active management and other parts of the investment management process”, says Minister of Finance Sigbjørn Johnsen.

The report proposes several changes to better regulate the risk in active management. A key change is that the scope for active management measured in terms of expected tracking error is reduced from the current upper limit of 1.5 percentage points to a limit of 1.0 percentage points – but with room for deviations in exceptional circumstances. Moreover, alternative measures to limit risk are enhanced, such as limits to leverage and requirements on concentration risk and absolute overlap between the actual and the benchmark portfolio.

In next year’s report to the Storting, the Ministry will return to the question of whether the fund’s benchmark portfolio ought to include exposure to systematic risk factors beyond market risk.

Responsible investing
“The Government Pension Fund Global is a responsible investor. This will support a good return over time as well as safeguarding the values held by the owners of the fund, the population of Norway. Sustainable development in economic, environmental and social terms is a prerequisite for good long-term returns. We will therefore use the instruments we have as a financial investor to contribute to such a development”, says Minister of Finance Sigbjørn Johnsen.

In 2009, the Ministry of Finance carried out a comprehensive evaluation of the set of ethical guidelines introduced in 2004. Many important features from these guidelines were retained in a new and more comprehensive strategy for responsible investment practice. New guidelines for responsible investment practice have now replaced the ethical guidelines.

“So far active ownership and exclusion of companies have been the main tools for meeting the fund’s ethical obligations. We are now supplementing these tools with measures and initiatives that will help us take factors relating to governance, environmental and social issues into due consideration throughout our investments. In light of the fund’s characteristics – its size, long-term perspective and presence in markets all over the world – we believe that sustainable development in its widest sense will also benefit financial returns”, says Johnsen.

Over the last year we have increased our international collaboration and contribution to the development of best practice, as well as initiating a targeted investment programme aimed at environment-related investment opportunities. Further to this, the Ministry of Finance is taking part in a research project with several major international pension funds and the consultancy Mercer. The project is considering what consequences various climate scenarios might have for the global capital markets and how investors ought to react in light of this.