Opening speech at the seminar "Management of the Norwegian Government Pension Fund Global"

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Opening Speech from State Secretary Paal Bjørnestad

 

It’s a great pleasure to welcome you to the Ministry of Finance, Professor Ang, to present your report on the Government Pension Fund Global.

I am also happy that so many of you have accepted to participate and give the Norwegian Government advice on this important topic.

We have looked forward to this seminar with great anticipation.

• Firstly, because we expect it to deepen our common understanding of the performance so far and the best way forward. Any changes to the Fund's strategy should be based on comprehensive and professional assessments. This seminar will give us an even better basis for decisions. 
  
  
• Secondly, because it contributes to accountability and transparency in the management of the Fund. Managing the Norwegian People’s savings is a great responsibility. Scrutiny from academics and financial experts is important in ensuring the best possible decisions.
  
  
• Thirdly, because – we hope – it will emphasize the benefits of sticking to the Fund’s overall strategy – maximizing the return.

Allow me as an introduction to highlight key parts of our current strategy.

The Fund’s long term investment strategy, set by the Ministry, provides a broad diversification across asset classes, countries and sectors.

The overall risk is predominantly determined by these strategic allocations.

60 percent of the fund’s capital is invested in equities. The remaining capital is invested in bonds and real estate. The latter should not exceed 5 per cent.

Taking on systematic risk should provide a pay-off in the form of higher expected return over time.

We also exploit the Fund's ability to bear risk by building on its special characteristic as a large, long-term investor.

The mandate allows for moderate deviations from the benchmark. The purpose is to improve the trade-off between return and risk.

According to the mandate, Norges Bank may deviate from the benchmark index within risk limits, where the limit of 1 percent tracking error is of most importance.

We have invited you here today to discuss whether any changes to the strategy and delegation to Norges Bank may improve the Fund’s expected return. 

A key question is whether the manager is actually able to add value when markets are fairly efficient. Or will any attempt to add value simply disappear in additional costs?

And what type of activities and strategies may an asset manager implement to add value.

We will revert to these questions and present our recommendations in the White Paper we will submit to the Parliament next spring.

The report by Professor Ang, Professor Brandt and Denison, together with advice from Norges Bank and this seminar, will provide valuable input to the White Paper.

Another topic, which requires more attention, is the importance of sticking to the objective of maximizing returns. 

The Fund’s large size makes it a tempting vehicle for short-term political gain – at the expense of longer‐term return.

It seems to be a free lunch to use the Fund to promote e.g. development in Africa or infrastructure for renewable energy. But, as pointed out in the report from Ang, Brandt and Denison, pursuing non-financial objectives comes with a cost.

Other large funds have been subject to such pressure. The lessons are very clear; imposing well-intentioned – but non-financial changes in the investment strategy leads to lower performance. That is; less resources to pursue political aims through the Government budget.

We need to stress that the Fund is a financial investor – not a political tool to solve global problems like poverty and climate change.

All of you are well qualified to advise on the topics we are here to discuss.

But you have not only been invited because of you qualifications. You have also been invited because we think you have somewhat diverging views.

We think it is a strength to get all diverging views on the table before the Government decides on its recommendations to the parliament.

I look forward to the presentations and the debates.

With that I would like to invite Professor Ang to present his report.

Andrew Ang is a professor of Finance at Columbia Business School. He is an international recognized expert on Asset Management and has published widely in top academic journals. Today we have given him the difficult task of presenting a 160 page report in 40 minutes. 

Please, Professor, the floor is yours.