New YorkLondonOsloShanghaiSingapore

01 JANUARY 2013

Investment Mandate for the Government Pension Fund Global

This investment mandate has been issued by Norges Bank’s Executive Board to the Executive Director and Chief Executive Officer (“the Executive Director”) of Norges Bank Investment Management (NBIM), last amended 21 November 2012.

The Investment Mandate for the Government Pension Fund Global (GPFG) (1) issued by the Executive Board of Norges Bank incorporates applicable investment provisions from the Management mandate for the GPFG issued by the Ministry of Finance. These provisions are shaded and are written in italics.

Chapter 1. General Provisions

 
Management assignment

The Bank shall make Investment decisions independently of the Ministry of Finance. The Bank shall seek to achieve the highest possible return after costs measured in the GPFG’s currency basket.


The Government Pension Fund Global (The Fund) shall be managed subject to the constraints set out below and in accordance with NBIM’s strategy plan. The objective shall be achieved in a controlled manner. The Fund should be invested to improve the risk-return relationship and exposed to different systematic risk factors.

The Fund shall be structured in such a way that it is possible, with a reasonable degree of assurance, to manage the Fund within the quantitative risk limits, laid down by the Ministry of Finance and this Mandate. The Fund shall be managed in accordance with the Executive Board’s Principles for risk management in NBIM.

Responsibility for investment management may be delegated subject to applicable restrictions and in accordance with NBIM’s strategy plan. Formal investment mandates are to be issued for all internally and externally managed portfolios. These mandates must, as a minimum, contain a specification of the investment universe and risk limits. The overall mandate structure shall ensure the diversification of the Fund.

Investment activities shall at all times comply with relevant laws and regulations in the markets where NBIM invests.       

Strategic and actual benchmark index

The strategic and actual benchmark indices applicable to this mandate are described in appendix 1.

If the equity share of the actual benchmark index on the last trading day of the month deviates by more than four percentage points from the weight in the strategic benchmark index, rebalancing shall take place on the last trading day of the following month.
 

NBIM shall inform the Ministry immediately if the criteria for rebalancing are met. The Bank shall report on the implementation of rebalancing, including estimates of associated costs.

 

External managers

The Bank may use external managers. The fee structure in agreements shall be designed to maintain the investment portfolio’s targets, taking into account the time horizon of the relevant investment strategies. The individual agreements with managers on performance-based fees shall be structured so that the Fund retains a major proportion of the positive excess return including provisions for caps on fees (See Chapter 3, Management restrictions set by the Executive Board number 3)

 
(1) In the case of inconsistencies between the CEO Investment Mandate for the GPFG issued by Norges Bank’s Executive Board and the Management mandate for the GPFG issued by the Ministry of Finance the latter will prevail.  
    

Chapter 2. Responsible investment

 

Responsible management

The Bank shall have internal guidelines for integrating considerations of good corporate governance and environmental and social issues in investment activities, in line with internationally recognised principles for responsible investment. The integration of these considerations shall occur in respect of the investment strategy and the Bank’s role as financial manager. In executing its management assignment, the Bank shall give priority to a long-term horizon for the investment strategy and the investments being broadly placed in the markets included in the investment universe.

In its management of the real estate portfolio, the Bank shall in the area of environmental protection give priority to considerations of energy efficiency, water consumption and waste management.

 

Active ownership

The Bank’s primary goal in its active ownership is to safeguard the investment portfolio’s financial interests. Active ownership shall be based on the UN Global Compact, the OECD’s Principles of Corporate Governance and the OECD’s Guidelines for Multinational Enterprises.

    

 Environment-related investments

The Bank shall establish environment-related mandates within the limits defined in the Management mandate from the Ministry of Finance, section 3-5. The market value of the environment-related investments shall normally be in the range of 20-30 billion kroner.

 
Chapter 3. Management of the investment portfolio
  

Investment universe

1) The investment portfolio may be invested in financial instruments, real estate and cash deposits that have been approved through a formal process, with the following limitations: 

 

a. the equity portfolio can be invested in equities listed on a regulated and recognised market place, listed securities that are equivalent to listed equities, and depository receipts for such equities, and in unlisted companies in which the board has expressed an intention to seek a listing in a regulated and recognized market place;
b. the fixed income portfolio can be invested in tradable debt securities and other tradable debt instruments, and depository receipts for these types of fixed income instruments;
c. the real estate portfolio can be invested in real estate, equity or interest-bearing instruments issued by listed and unlisted companies, fund structures and other legal entities whose primary business is the acquisition, development and management or financing of real estate. The investments can be made through Norwegian or other legal persons. Investments in listed equity instruments shall be carried out on regulated and recognised markets. Real estate in this chapter means rights to land and any buildings that are found upon it;
d. financial derivatives and fund units that are naturally linked to the investments in the equity-, fixed income- and real estate portfolio;

 

2) The Bank shall not invest the investment portfolio in:

a. securities issued by a Norwegian enterprise and securities denominated in Norwegian kroner, real estate located in Norway or real estate companies, real estate funds or similar structures whose primary purpose is to invest in Norway. The same shall apply to covered bonds secured against assets in Norway. “Norwegian enterprise” means enterprises whose head office is in Norway.
b. securities that the Ministry of Finance has excluded from the investment universe, cf. section 8 of the guidelines of 1st March 2010 for observation and exclusion of companies for the GPFG;
c. fixed income instruments issued by governments or government-linked issuers in exceptional cases where the Ministry has barred such investments based on large-scale international initiatives that Norway supports and that are aimed at specific countries;
d. unlisted companies and fund structures in countries with which Norway does not have tax agreements with or other countries than those Norway may demand tax information from pursuant to other international legal agreements;

 

3) The real estate portfolio shall not include infrastructure such as roads, railways, harbours, airports and other fundamental infrastructure.

 

4) The Bank may own financial instruments and derivatives that are received by the portfolio as a result of corporate actions.

 
Return targets for the real estate portfolio

 The Bank shall aim to achieve a net return on the real estate portfolio that at least equals Investment Property Databank (IPDs) Global Property Benchmark with the exception of Norway, adjusted for the actual impact of leverage and the actual management costs.

 

Management restrictions

1) The Bank shall organise the management with the aim of the annualised standard deviation for the excess return between the actual portfolio and actual benchmark index does not exceeding 1 per cent on an ex ante basis (expected tracking error).

2) The Bank shall seek to ensure that the return on active positions on an ex ante basis is exposed to several different systematic risk factors.

3) The Bank shall organize the management with the aim that high yield bonds (credit rating lower than “investment grade”) do not exceed more than 5 per cent of the market value of the fixed income portfolio. A credit rating is required for all investments in fixed income instruments. All internal credit rating assessments shall be documented.

4) The Bank shall seek to take into account differences in fiscal strength between countries in the composition of the portfolio of government bonds.

5) Exposure to equities in the investment portfolio shall be in the range of 50 – 70 per cent. Exposure to listed equity in the real estate portfolio shall not be taken into account. In this calculation, derivatives shall reflect their underlying economic exposure. Exposure shall be calculated in relation to the investment portfolios Net Asset Value (NAV). 

6) Within the equity portfolio, the Bank may not acquire more than 10 per cent of the voting shares in an individual company.

7) NBIM shall place up to 5 per cent of the investment portfolio in the real estate portfolio, see §3-5 (7)).

8) The Bank shall seek to spread the transition over several years and over relevant risk factors. The pace of the transition shall be determined on the basis of the Bank’s long-term expectations of net return and risk in the real estate market and the investment portfolio’s possible investments in other markets

9) The real estate portfolio shall be well diversified in geography, and over sectors, properties and instruments.

10) Leverage may be used with a view to performing the management task in an effective manner, but not with a view to increase the investment portfolio’s exposure to risky assets in the equity- and fixed income portfolio. Leverage can also be used in fund structures, and by other legal persons with the aim to implement the management assignment in an effective manner, but such leverage may not be with the aim to increase the investment portfolio’s financial exposure to risky assets.  

11) Reinvestment of cash collateral shall not take place with a view to increasing the investments portfolio’s financial exposure to risky assets. 

12) Sales of securities not owned by the bank (short sale) can only be made if the bank has access to the securities through an established borrowing arrangement.The Bank shall aim to achieve a net return on the real estate portfolio that at least equals

  

Management restrictions set by the Executive Board

1)The Bank shall establish supplementary limits applying for risks that, based on experience, are not captured well by the expected relative volatility, including:

 

a. limits for the minimum overlap between the equity- and fixed income portfolio and corresponding actual reference indexes;


The overlap between actual portfolio and actual benchmark index must be at least 60 per cent for the equity part of the portfolio and 60 per cent for issuers in the fixed income part of the portfolio. 

b. credit risk limits at the individual issuer and portfolio levels(2);
c. Liquidity risk limits;

A minimum of 10 per cent of the net asset value of the investment portfolio shall be held in liquid instruments. Liquid instruments are defined as treasury bonds issued by the governments of France, Germany, Japan, the United Kingdom and the United States of America.

d. Counterparty risk limits;
  1.  Potential future counterparty exposure shall not exceed 0.50 per cent of the net asset value of the investment portfolio for any single counterparty.
  2.  Counterparts to unsecured deposits shall have a minimum long-term rating of minimum “A” or the equivalent. Counterparts to collateralised instruments or contracts shall have a minimum long-term rating of at least “BBB” or the equivalent. Counterparts used for real estate daily cash management can be approved with a minimum rating requirement of BBB. Counterparts for pre-initial public offerings (pre-IPO) or related to the acquisition of private real estate needs separate approval. Guidelines should be in place to ensure that a documented credit and operational risk assessment has been performed.
  3. All securities financing transactions and trading in OTC derivatives shall be subject to adequate collateral criteria. Netting agreements shall be in place before trading takes place.
  4. The CEO may make exemptions from these requirements with regard to main NBIM counterparts under special market circumstances. The Executive Board shall be informed of such exemptions.
e. Leverage limits
 

Leveraging the equity and fixed income portfolio is not permitted beyond what is necessary to minimise transaction costs or is a normal part of investment management, and not in excess of 5 per cent of the net asset value of equity and fixed income.

 f. Limits for the reinvestment of cash collateral received;

 
Cash collateral received can only be invested in cash equivalent instruments.

g. Limits for securities borrowing.  

The borrowing of securities may not exceed 5 per cent of the net asset value of the investment portfolio.

  1. Lending of securities is permitted, provided that NBIM ensures that adequate security is provided for the loan. Securities lent shall not exceed 35 per cent of the net asset value of the investment portfolio;
  2. When lending securities from the portfolio, one voting share in each company shall, as a minimum, always be retained to ensure that ownership rights can be exercised;
  3. The issue of call options on individual securities that are not held in the actual portfolio is not permitted. Issuing of put and call options (measured as notional value) is limited to 2.5 per cent of the net asset value of the investment portfolio;
  4. A maximum of 1.5 per cent of the net asset value of the investment portfolio may be invested in a single company’s equity;
  5. When funding real estate investments from the fixed income part of the portfolio, consideration shall be given to maintaining the total currency risk of the investment portfolio;
2) In addition, the Bank shall limit the risks related to the real estate portfolio through limits for:
 
a. Provisions for caps of fees paid to external managers.  

 
Ivestments in a single country shall not exceed 10 per cent of the targeted strategic asset allocation for the real estate portfolio, except for the United States of America, United Kingdom, Germany and France which shall not exceed 35 per cent of the targeted strategic asset allocation for the real estate portfolio.

b. Investments in real estate sectors;  
 

The real estate portfolio shall be diversified in accordance with the following sector allocation of the targeted strategic asset allocation for the real estate portfolio:

a) Office              0 — 60 per cent
b) Retail             0 — 60 per cent
c) Other              0 — 30 per cent

  

c. Investment in emerging markets;
 

Investments in emerging markets shall not exceed 10 per cent of the targeted strategic asset allocation.

d. Investments in real estate under development; 


The net asset value invested in property under development shall not exceed 15 per cent of the net asset value of the investment in the real estate portfolio.

e. Investments in vacant real estate;


The average economic vacancy rate for property within the real estate portfolio shall not exceed 15 per cent.

f. Investments in a single year (vintage);


Investment in one calendar year (vintage year) shall not exceed 2 per cent of the net asset value of the investment portfolio.

g. Investments in interest-bearing instruments; 


Investment in interest bearing instruments shall not exceed 25 per cent of the targeted strategic asset allocation for the real estate portfolio.

h. Investments in listed equity;


Investment in listed equity shall not exceed 25 per cent of the targeted strategic asset allocation for the real estate portfolio.

i. Total debt ratio and maximum leverage on single  investments;


The debt ratio of the real estate portfolio shall not exceed 50 per cent. No single investment shall have a debt ratio of more than 70 per cent. 

3) The Bank shall have a limit for how large a part of the investment portfolio’s capital a single external manager may manage:


Investment with a single external manager shall not exceed 1 per cent of the net asset value of the investment portfolio. The Executive Director may make exemptions from this maximum restriction in special circumstances for contingency purposes or transition management. The Executive Board shall be informed of such exemptions.

Agreements with each external manager shall contain provisions to ensure that the total annual fee paid per external mandate does not exceed a maximum amount, which shall not be above USD 25 million or currency equivalent. Performance fees accrued above the maximum amount may be paid the following year, subject to that year’s maximum pay out and excess return over the relevant time period.

4) Limits stated in the management restrictions set by the Executive Board 1) a) to g), 2) and 3), and subsequent expansion of these, shall be presented to the Ministry at least four weeks prior to their planned implementation, unless special circumstances indicate a shorter time limit.


(2) The credit risk limits at the combined fixed income portfolio level are detailed in “management restrictions chapter 3”

 
Chapter 4. Entry into force 

This investment mandate enters into force 1 January 2013. This investment mandate shall be submitted to the Executive Board for review annually.

 

Appendix 1

Applicable benchmarks information as reflected in the management mandate for the GPFG issued by the Ministry of Finance.

 

Chapter 1 - Section 3 Strategic benchmark index
(1) The strategic benchmark index has three components:

a) benchmark index for equities, cf. section 3-3
b) benchmark index for bonds, cf. section 3-2
c) GPFG’s real estate investments, cf. chapter 4 

(2) The benchmark index for equities constitutes 60 per cent of the strategic benchmark index. The benchmark index for bonds constitutes 40 per cent of the strategic benchmark index, less the share of the value of GPFG invested in real estate. The value of the real estate investments is calculated as a net value, cf. section 4-2, second paragraph.

Chapter 1- Section 4 Actual benchmark index
(1) The actual benchmark index has three components:

a) benchmark index for equities, cf. section 3-3
b) benchmark index for bonds, cf. section 3-2
c) GPFG’s real estate investments, cf. chapter 4 

(2) The proportions of equities, bonds and real estate in the actual benchmark index move with market developments in the benchmark indices for equities and bonds, adjusted for developments in the value of GPFG’s real estate investments. Market developments are measured as the total rate of return. The value of the real estate investments is calculated as a net value, cf. section 4-2, second paragraph. The proportions are calculated daily.

(3) The Ministry will provide more detailed provisions on the transfer of new capital to GPFG.

(4) The Ministry will provide more detailed provisions on the rebalancing of the actual

benchmark index.

Chapter 3 - Section 2 Benchmark index for bonds
(1) The benchmark index for bonds has fixed weights with monthly rebalancing to the following sub-indices:

a) Government bonds: 70 per cent
b) Corporate bonds: 30 per cent

(2) The government bond sub-index of the benchmark index for bonds comprises:        

a) all securities included in the Barclays Global Inflation-Linked Index (Series L)
b) all securities included in the Barclays Global Treasury GDP Weighted by Country Index
c) all securities included in the supranational sub-group (of the government-related sub-sector) of the Barclays Global Aggregate Index

(3) Bonds issued by supranational organisations are allocated to countries in the government bond sub-index on the basis of the currencies in which the securities are issued. Bonds issued by supranational organisations in euros are allocated to the category “Supranational organisations (EUR)”.

(4) Country weights in the government bond sub-index are calculated on the basis of the rules for the Barclays Global Treasury GDP Weighted by Country Index, with a special provision for countries in the euro area. Country weights for the euro area are calculated on the basis of the Barclays Global Treasury GDP Weighted by Country Index, but adjusted for the allocation to “Supranational organisations (EUR)”:

a) Proportion of “Supranational organisations (EUR)” in the euro area = X
b) Allocation to “Supranational organisations (EUR)” = X * total GDP weight for countries in the euro area based on Barclays’ rules
c) For all countries in the euro area: Country weight = (1-X)*GDP weight for the country based on Barclays’ rules

X is determined for each calendar year as the relationship between the market value of “Supranational organisations (EUR)” and the market value of all euro-denominated bonds included in the government bond sub-index. The market values are calculated as at the end of November the previous year, based on index data published by Barclays.

(5) Within each country in the government bond sub-index, the bonds included are weighted using the methodology for the Barclays Global Treasury GDP Weighted by Country Index.

(6) The corporate bond sub-index of the benchmark index for bonds comprises all securities included in the corporate sub-sector and the covered bond sub-group (of the securitised sub-sector) of the Barclays Global Aggregate Index. The corporate bond sub-index is restricted to the following approved currencies: US dollars, Canadian dollars, euros, pounds sterling, Swedish kronor, Danish kroner and Swiss francs.

(7) Within the corporate bond sub-index, the bonds are weighted using the methodology for the Barclays Global Aggregate Index.

(8) Securities denominated in Norwegian kroner or classified by Barclays as issued in Norway shall be excluded from the benchmark index for bonds. The same applies to securities excluded on the basis of the guidelines for observation and exclusion. When bonds are excluded from the benchmark index, the remaining bonds in the sub-index in question shall be weighted up.

Chapter 3 - Section 3 Benchmark index for equities
(1) The benchmark index for equities is composed on the basis of the FTSE Global All Cap Index.

(2) The equities in the benchmark index are assigned the following factors based on their country of origin:

a) European developed markets excluding Norway: 2.5
b) USA and Canada: 1
c) Other developed markets: 1.5
d) Emerging markets: 1.5
The allocation to countries and regions and the distinction between developed and emerging markets are based on the FTSE Global All Cap Index

(3) Each country is included in the benchmark index with a weight based on the following formula:
where i represents the countries with the factor in question, cf. section 3-3, second paragraph. The calculation of market capitalisation is based on the methodology for the FTSE Global All Cap Index and adjusted for free float.
(4) The benchmark index is adjusted for the Bank’s tax position.
(5) Securities excluded on the basis of the guidelines for observation and exclusion shall not be included in the benchmark index for equities.
  
  
  
Print
Last Updated: 04 October 2012

Norges Bank Investment Management (NBIM) | Bankplassen 2, P.O. Box 1179 Sentrum | NO-0107 Oslo, Norway | Tel +47 24 07 30 00 | E-mail contact@nbim.no | Disclaimer