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Investment strategy

Investments are spread across most markets, countries and currencies to achieve broad exposure to global growth and value creation. The fund has a long-term investment horizon and limited liquidity needs.

The investment strategy aims to take advantage of the fund's long-term horizon and considerable size to generate high returns and safeguard wealth for future generations. The fund is to be invested responsibly within its overall financial objective. The aim is to have diversified investments that bring a good spread of risk and the highest possible return subject to the constraints set out in the mandate from the Ministry of Finance.

The strategy has evolved over time on the basis of expert reviews, practical experience and in-depth analysis. Major changes require parliamentary approval. There is broad political agreement that the fund should not be a political instrument of foreign or climate policy.

INVESTMENT MANDATE

The mandate specifies which markets the fund can be invested in, and sets limits for allocations to different asset classes. It reflects an understanding of how markets function, as well as the fund’s purpose and characteristics.

The fund's benchmark index

The benchmark index is set by the Ministry of Finance on the basis of indices from FTSE Group and Bloomberg Barclays Indices. The equity allocation in the strategic benchmark index has been set at 62.5 percent, with fixed income accounting for the remainder. These allocations are subject to market, sector and currency weights. The Ministry of Finance has decided to increase the equity share in the benchmark to 70 percent. The increase will be implemented gradually.

Norges Bank may also decide that the fund should invest in unlisted real estate, up to a maximum of 7 percent of the fund’s investments.

The mandate determines an actual benchmark index may deviate from the strategic benchmark index as a result of general market movements. Furthermore, there is a limit to deviation from the actual benchmark index within an expected relative volatility of 1.25 percentage points. Expected relative volatility measures how much the return on the fund can be expected to deviate from the return on the benchmark index in a normal year.

Norges Bank constructs a portolio that will differ somewhat from the actual benchmark index in order to exploit the fund’s characteristics and advantages, and to fulfil mandate requirements such as environment-related investments and countries' fiscal strength. It also provides an opportunity to make the management of the investment portfolio more cost-effective.

Rebalancing

If the equity allocation in the actual benchmark index moves significantly higher or lower than the strategic allocation, this will result in a different risk and return profile to that which has been agreed and is desired. There are therefore rules on rebalancing of the equity allocation in the actual benchmark index.

The managment mandate

investment STRATEGIES 

Our investment strategies aim to exploit the fund’s characteristics as a large, global investor with limited short-term liquidity requirements in order to achieve a high return with acceptable risk. The fund’s investment strategies fall into three main strategies: fund allocation, security selection and asset management.

Fund allocation strategy

Our fund allocation strategies aim to improve the fund’s market and risk exposure in the long term through a reference portfolio more adapted to the fund than the benchmark index.

The reference portfolio serves as the starting point for the fund’s investments. The objective of the reference portfolio is to obtain the best possible long-term risk and return profile for the fund, within the opportunity set defined in our management mandate. We seek to improve diversification by including additional markets and market segments, to enhance returns through allocation to systematic factor strategies.

We invest in unlisted and listed real estate with the objective of improving the trade-off between return and risk in the fund. Investments in real estate are funded by selling a tailored mix of equities and fixed-income investments in the same currency. Fund allocation manages these funding decisions. Certainty about the availability of funding is one of the fund’s comparative advantages when we invest in real estate.

Market movements result in a portfolio that deviates from the reference portfolio’s strategic exposures to equity, duration and currency risk. Allocation decisions are made to balance transaction costs, risk and valuation when rebalancing the portfolio back to the strategic exposures. Within emerging markets, allocation decisions are made to refine the reference portfolio to avoid high transaction costs, manage risk and capture a changing opportunity set. This entails allocation to frontier markets and emerging market debt, as well as the use of tailored benchmarks for external managers.

Security selection strategy

The aim of our security selection strategies is to achieve excess return compared to relevant benchmarks. This applies both to the internal and external security selection strategies.

The aim of internal security selection activities is to enhance returns and help ensure that the fund’s role as a responsible and active owner has a robust foundation. For a long-term investor, developments over time in individual companies and industries ultimately play a large role in determining the return that can be achieved. In the short run, returns in capital markets are affected by a number of factors. As a result, realised returns may or may not be closely related to underlying developments in the companies. As the investment horizon increases, however, developments in the companies’ profit and cash flow become increasingly important.

Investments are made based on a strong understanding of individual companies and their long-term prospects. We put considerable resources into researching large companies, the markets in which they operate, and the issues they face. The knowledge created through security selection activities also supports understanding of risks in the overall portfolio. We have meetings with the companies we invest in, typically with senior management. This dialogue improves our understanding of the companies, builds strong relationships and supports our ownership work.

We also invest in emerging market equities through locally based external managers. We select managers who are proficient both in assessing the return potential of individual companies, and in understanding the companies’ environmental, social and governance risks. Market-specific knowledge is required, since public transparency and corporate governance standards vary considerably across these markets. We monitor our investments continuously, visit our external managers frequently and are able to make swift changes if necessary.

Asset management strategy

Our asset management strategies aim to generate good return over time through asset positioning and securities lending, and lowering transaction costs.

We manage factor exposure dynamically, combining a diverse set of systematic strategies across a number of investment horizons in a turnover-controlled manner.

Securities lending is an integrated part of our asset management strategies. We use both direct internal lending and external agency lending through our custodian. We seek to optimise the risk/reward trade-off from lending activities by offering lending terms and structures that are attractive.

We aim to minimise and control the transaction costs of implementing the fund’s investment strategies. We try to be patient in our portfolio rebalancing decisions, utilising natural liquidity and capital market events to implement longerterm exposure targets when we can, and avoiding the weaknesses of stricter, mechanical benchmark replication. Benchmark replication often leads to higher friction costs, particularly for large, global funds. Where possible, we try to benefit from the liquidity need of other, more constrained market participants.

Risk is controlled at the regional, sector and issuer level. Some of these strategies will expose the fund to tail risks, and we monitor these risks closely. 

Strategy 2017-2019 for Norges Bank Investment Management

Holdings

We invest in around 9,000 companies and have investments in 72 countries. The fund's annual holdings are available from 1998 to the end of 2017.