Long-term, good management of our common savings

“Long-term, good management means that the assets in the Government Pension Fund can benefit both current and future generations. The investment strategy will be further developed. In line with what we announced last year, we are now preparing to make changes to the strategy in several areas. This will strengthen the foundations for the investments,” says Sigbjørn Johnsen, Norway’s Minister of Finance.

The Norwegian Government is today presenting a report to parliament (Storting) on the management of the Government Pension Fund in 2011.

“The starting point for our work on the strategy is to seek the highest possible international purchasing power, at a moderate risk. The Government Pension Fund is managed on behalf of the Norwegian people. Common ethical values must form the basis for a responsible management of the Fund,” says Finance Minister Johnsen.

“More than half of the Fund is currently invested in Europe. Since we have traditionally bought most of our goods and services from Europe, it has been natural to think that we are protecting the Fund’s international purchasing power against exchange rate fluctuations by investing considerably in European securities markets. New research presented in last year’s report showed that the exchange rate risk in the Government Pension Fund Global is relatively small and less than previously assumed. The conclusion was thus that the Fund’s relative share of European investments should be reduced over time, so that the Fund’s geographical diversification was further improved. The Norwegian parliament agreed with this view,” says Mr Johnsen.

The report presents plans for a change to the Government Pension Fund Global’s investment strategy in line with our statements last year. The changes mean that the European proportion is to be reduced from 54 to closer to 40 percent. The emerging markets share will increase from 6 to 10 per cent. This increase reflects the fact that the world’s economic centre of gravity is gradually moving towards emerging markets.

“The Government Pension Fund has been managed well. The investment strategy has been developed gradually since the first transfer to the Fund in 1996. This year, we are taking new steps to achieve an even better geographical diversification of our investments. By building further on long-term, good management, we enable the oil revenues to benefit all generations,” says Mr Johnsen.

Results in 2011
The total market value of the Government Pension Fund  Global increased by NOK 234 billion to NOK 3 312 billion in 2011. The inflow to the Fund was NOK 274 billion, while its investments made a loss of NOK 86 billion or 2.5 percent. The return was 0.1 percentage points lower than that of the Fund’s benchmark. The value of the Government Pension Fund Norway fell by just over NOK 5 billion to NOK 129.5 billion. The investments made a loss of 3.9 percent, which is 1.3 percentage points better than the Fund’s benchmark.

“Experience has shown that the value of and the return on the Government Pension Fund may fluctuate considerably from year to year. The Fund is well able to tolerate such fluctuations. First and foremost because the Fund is a long-term investor. The fiscal policy rule for the use of oil revenues in the annual state budgets is also accommodated to handle such fluctuations,” says Mr Johnsen.

Over time, the management of the Government Pension Fund has created considerable value. Since 1998, return of the investments in the Government Pension Fund Global has equalled NOK 640 billion. The results achieved by Norges Bank’s active management have contributed to this performance.

The real return on the investments in the Government Pension Fund Global is estimated to be 4 percent. This estimate is intended to cover both economic upturns and downturns over several generations. For the 1997-2011 period, the real return on the Government Pension Fund Global was an average of 2.7 percent per annum. The return during these 15 years is well within what must be expected to be normal fluctuations around a 4 percent expectation.

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Read more:

• Report No. 17 to the Storting
• Press release 6/2012: Further development of the investment strategy for the Government Pension Fund Global
• Presentation used at the press conference

External reports prepared as background for the Ministry’s report to Parliament are available here.