Good long-term management of the Government Pension Fund

The Government is today submitting its report to the Storting on the management of the Government Pension Fund in 2012. – The Fund makes a major contribution to safeguarding welfare, whilst at the same time enabling us to save for future generations, says the Minister of Finance, Sigbjørn Johnsen.

Good performance
The Fund performed well in 2012. The return on the Government Pension Fund Global (the GPFG) was 13.4 percent and the return on the Government Pension Fund Norway (the GPFN) was 12.2 percent, before the deduction of management costs. Last year, these costs accounted for 0.06 percent and 0.09 percent of average fund assets, respectively. The overall value of the Government Pension Fund at the end of 2012 was NOK 3,961 billion; an increase of NOK 520 billion on its value from the beginning of the year.

– International economic developments remain uncertain. We need to be prepared for potentially large fluctuations in the value of the Fund in coming years as well, says the Minister of Finance.

The performance reflects last year's developments in global equity and bond markets. In addition, the active management of both Norges Bank and Folketrygdfondet delivered positive contributions. – Active management has over time contributed to an excess return well in line with the expectations we have communicated, says Finance Minister Sigbjørn Johnsen.

The total return on the GPFG, since the initial capital contribution in 1996, was NOK 1,087 billion at the end of 2012, net of management costs.

The Ministry emphasises cost efficiency in the management of the Government Pension Fund. Comparisons with other funds show that the management costs of the Pension Fund are low.

The strategy of the GPFG
Over time, a number of important decisions have been made in refining the strategy of the GPFG. Last year, the Ministry changed the benchmarks for the equity and fixed income investments of the Fund. Adjustments to the new geographical distribution implied by these changes are ongoing.

This year's report follows up on the decisions made last year. The Ministry presents analyses of several aspects of the strategy, but does not present plans for major changes to the investment strategy of the Fund.

One theme in this year's report is the fixed income benchmark of the Fund. The Ministry has examined whether inflation-linked bonds should be removed from the benchmark, but has concluded that these bonds should remain a benchmark component.

Another theme is the composition of the equity investments. The report considers characteristics of strategies that exploit so-called systematic risk factors. Such strategies are based on a broadly diversified equity portfolio, but tilt the investments towards specific risk factors. One example is the "value factor", which reflects the observation that companies with low valuations have over time delivered higher returns than companies with high valuations. Another example is the factor "size", which reflects the observation that small companies have over time delivered higher returns than large companies. The analyses of risk and return associated with systematic risk factors show, amongst other things, that the size of the Fund poses special challenges if such factors are to influence the investment decisions.

– Our assessment is that the benchmark index of the GPFG should not be adjusted for systematic risk factors. Any strategies for exploiting such factors should instead form part of the operational management of Norges Bank, says Finance Minister Sigbjørn Johnsen.

Responsible investment practice
We have a fundamental obligation to generate a good long-term return that will benefit both current and future generations. A favourable return depends on sustainable economic, environmental and social development. Consequently, responsible investment forms an integrated part of the management of the Fund.

– We wish to refine the responsible investment strategy further. The Strategy Council for the GPFG has been tasked to prepare a report on the overall strategy of the Fund in this area. Our ambition is that the management of the Fund shall represent best practice for responsible investment, and that the Fund shall act to promote the further development of best practice, says the Minister of Finance. The Strategy Council's report will be submitted in the autumn.

Widespread support and transparency
That the management of the Government Pension Fund enjoys widespread support is important as it enables us to adhere to the long-term strategy, especially during times of market turbulence. The risk associated with the management of the Fund needs to be communicated, managed and controlled in a clear and effective manner.

– A thorough decision-making process is a strength of the investment strategy. The report to the Storting is intended, alongside the reporting of Norges Bank and Folketrygdfondet, to contribute to transparency and broad-based debate concerning the management of the Fund, says the Minister of Finance, Sigbjørn Johnsen.

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Read more:

• Report No. 27 to the Storting (Preliminary and unofficial translation, chapters 1 and 2)