Rebalancing
The Ministry of Finance selects the asset classes and regions the Government Pension Fund Global invests in. These selections are known as investment weights. A distinction is made between strategic weights and actual weights.
The strategic weights are set at 60 percent equities, 35–40 percent fixed-income securities and as much as 5 percent real estate investments.
Divergent price movements in the different asset classes and investment regions will over time change the relative proportion of the fund’s asset classes, causing the actual weights to diverge from the strategic weights. If the equity portfolio increases more in value than the fixed-income and real estate portfolios, this will push the fund’s share of equities above 60 percent. The fund’s regulations therefore allow the share of equity investments to move between 50 and 70 percent, while fixed-income and real estate investments combined may move between 30 and 50 percent. Fixed-income and real estate are grouped together in this instance because property investments shall be funded with fixed-income capital.
Rebalancing is the process of bringing the actual weights back in line with the strategic weights by buying or selling assets. This results in transaction costs. The portfolio may deviate from the strategic weights if the rebalancing frequency is too low, while a high rebalancing frequency will result in high transaction costs. The regime set by the Ministry of Finance shall ensure an appropriate rebalancing frequency.
