The methodology for calculating returns on the funds
managed by NBIM is based on the international standard
Global Investment Performance Standards (GIPS).1
The valuation of the funds is calculated according to the market value principle, which means that in the opening and closing values of the portfolios are set at market price at the beginning and end of the calculation period. In line with the pricing hierarchy applied, index suppliers’ prices are given priority for securities included in the benchmark indices.2
The market value calculated for the funds is based on the trade date. Transactions affect the composition of the fund on the day on which they are agreed even though it can take a number of days for them to be settled (value date). Interest expenses and income, dividends and withholding tax are accounted for on an accrual basis when calculating returns.
Transfers to the Government Pension Fund Global and between the equity and fixed income portfolios are normally made on the last business day of each month, but can also take place during the month. The return is calculated by looking at the change in market value, adjusted for incoming and outgoing payments, since the last calculation date (month-end or date of previous transfer to the fund). The geometrical return is used for longer periods, such as quarterly, annual and year-todate returns. This means that the return indices for each sub-period are multiplied to produce a timeweighted return. Returns for periods exceeding one year are annualised. Returns are calculated in both Norwegian kroner and local currency. The kroner return is calculated on the basis of market values in local currency translated into kroner using WM/Reuters exchange rates.3 The return in kroner is calculated on the basis of market values in local currency converted into kroner using WM/Reuters exchange rates. 4
The fund’s return expressed in the currency basket is based on the return measured in kroner and adjusted geometrically for the return on the currency basket. The currency basket corresponds to the currency weights in the benchmark portfolio, and the return indicates how much the krone has appreciated/depreciated against the currencies in the benchmark portfolio.
The excess return emerges as an arithmetical difference between the returns on the actual portfolio and the benchmark portfolio during the period in question (month, quarter, year or annualised period).
Developments in the fund’s international purchasing power are best expressed through the fund’s currency basket. Fluctuations in the krone exchange rate affect the return measured in kroner but have no bearing on the fund’s international purchasing power. Norges Bank therefore gives priority to presenting return data in international currency when reporting both the return on the fund and the excess return relative to the benchmark portfolio.
Returns are calculated in a separate system and then reconciled with the accounting system. Differences between market values calculated in the return models and market values in the accounts are primarily due to different valuation principles for money market investments. Provisions are also made in the accounts to cover the fee payable to Norges Bank.
1) The GIPS reports and the GIPS Compliance Manual, including formulae for calculating returns.
2) The benchmark indices are produced by FTSE Group and Barclays Capital for equities and fixed income respectively.
3) The fund invests in international securities denominated in foreign currencies. These investments are converted into Norwegian kroner for the fund’s periodic reporting and are not hedged. A change in the krone exchange rate has no effect on the fund’s international purchasing power. Consequently, the fund’s return is usually stated in international currency, i.e. a weighted selection of 35 foreign currencies. This is referred to as the fund’s currency basket.
4) WM/Reuters Closing Spot Rates, fixed at 4 p.m. London time.
