Norway is investing for the long term

- An important challenge is to stick to the long-term strategy in times of market unrest, writes Minister of Finance, Mr. Sigbjørn Johnsen in an letter to the editor, Financial Times, regarding the Government Pension Fund Global:

Financial Times 3.09.2012

In two thoughtful articles in your newspaper recently, Norway's sovereign fund – the Government Pension Fund Global – has received some positive attention for its investment strategy.

According to this strategy, equities should make up a fixed 60 percent share of the Fund. This implies that when equity markets fall sharply, the Fund buys more stocks to keep the equity allocation at the target level. This happened in 2002-2003 in the aftermath of the dot-com bubble and then again in 2008-2009 during the financial crisis.

In our view, this counter-cyclical element of the strategy is appropriate for the Fund as an investor with a very long investment horizon. The strategy is expected to enhance returns while being consistent with well-functioning and stable markets.

Buying equities in turbulent markets may involve additional risks. In our view, our Fund can stomach this risk better than many other investors. Equity markets involve much short-term volatility which is of lesser importance for truly long-term investors.

As your articles rightly point out, an important challenge is to stick to the long-term strategy in times of market unrest. This is why we take time to build broad consensus and commitment for the investment strategy. Note, however, that the mandate for the Fund is to maximise financial returns, and that its operational management is conducted by a professional investment management organisation, at arm's length from politics.

The current investment strategy has served us well. It builds on the Fund's characteristics: It is large, very long-term (we only spend expected returns, not principal), and government-owned.

Going forward, we will look for ways to develop our investment strategy in order to benefit even more from these characteristics. This may point to more emphasis on less liquid investments in general, and to provide more liquidity to markets in stressed conditions. It also points to a closer consideration of how to exploit various systematic risk premia in financial markets.

Future developments need not result in a higher overall level of risk in the Fund. Rather, the aim will be to improve expected returns within a moderate level of risk, by carefully considering risks which the Fund is particularly well-positioned to bear.

Our work on these questions is an ongoing effort. While the sum of changes over time may be significant, we progress gradually, and as your articles emphasise, in a transparent manner. We believe such an approach is appropriate to build a solid and lasting support for our strategy. Norway is investing for the long term and for further generations.