The Government Pension Fund Global is growing. Both its management and reporting are adjusting to changes in the landscape and the framework of the fund. 2011 marked the fund’s first investments in real estate. It was also the first year the fund’s financial reporting followed International Financial Reporting Standards (IFRS).
Norway invests a large proportion of its petroleum revenues in international equity, bond and real estate markets through the Government Pension Fund Global. Norway’s welfare must continue to build on the value created within its own borders. The fund’s investments provide us with a share of the value created outside our borders. The government and parliament have set limits for the risks the fund can take.
The fund’s management aims to achieve the highest possible return within these limits. Norges Bank’s Executive Board sets more detailed guidelines for NBIM’s management of the fund. The bank’s objective is to create value while safeguarding the owners’ long-term financial interests through active ownership and efficient implementation of management strategies.
Norges Bank has realised economies of scale in the fund management in recent years. Management costs as a share of the fund have dropped, even though the fund is increasing investments in equities and emerging markets.
Further steps were taken in 2011 to increase transparency of the fund’s management. The Executive Board’s mandate for NBIM’s CEO was revised and published. So were documents presenting principles for risk management, active ownership, organisation, management and remuneration at NBIM. The financial reporting for 2011 is the first to be presented in accordance with IFRS, making it easier to compare our reporting with that of large international companies. This harmonisation also extends to the notes, which have been expanded to include important information in areas such as repurchase agreements, valuations and collateral.
The fund is different from most investors. It does not need to borrow to invest and has no short-term liquidity requirements. We are in a position to manage the fund with a long-term perspective and ride out periods of great uncertainty. The fund’s size also means that we can exploit investment opportunities globally and in many different asset classes. Investments in real assets are in a start-up phase and we are mandated to invest as much as 5 percent of the fund in real estate. Investments in real assets will over time provide good protection against inflation and the direct yield may be expected to be relatively stable. At the same time, this type of investment presents new challenges in limiting Norges Bank’s risks and liabilities.
One of Norges Bank’s tasks is to advise the Ministry of Finance on strategic issues in the management of the fund. In the past year, the bank gave advice on key aspects of investment strategy, including allocations to different asset classes and regions and the division of responsibilities between manager and owner. The aim is to strike the best possible balance between risk and expected return.