Investment mandate for CEO of Norges Bank Investment Management
21 November 2018
The investment mandate is issued by Norges Bank’s Executive Board to the Chief Executive Officer of Norges Bank Investment Management. Laid down by the Executive Board 10 June 2009, last amended 21 November 2018.
The Investment Mandate incorporates applicable investment provisions from the Management Mandate for the Government Pension Fund Global, issued by the Ministry of Finance. These provisions are quoted below and marked in Italic and highlighted in grey in this document. In the case of inconsistencies between the Investment Mandate and the Management Mandate the latter will prevail.
1. MANAGEMENT ASSIGNMENT
1.1 General provisions
The Bank shall make investment decisions and exercise ownership rights independently of the Ministry.
The Bank shall seek to achieve the highest possible return after costs measured in the investment portfolio’s currency basket, see Ministry Mandate section 4-2 first paragraph, and within the applicable management framework.
NBIM CEO is through this investment mandate (“the Investment Mandate”) granted the responsibility for management of the Government Pension Fund Global (the Fund” or the “investment portfolio”).
The Fund shall be managed subject to the constraints set out below and in accordance with the Executive Board’s principles for risk management and responsible investments laid down for the management of the Fund and in accordance with the strategy plan.
1.2 Investment advice
Advice may be provided on the initiative of the Bank or on request from the Ministry.
NBIM CEO is responsible for providing well-founded and documented advice on investment strategy and other aspects of the investment management of the Fund to Norges Bank Executive Board, including but not limited to matters concerning strategic asset allocation, benchmark indices, investment limits and investment risk.
Advice can be provided on the initiative of NBIM CEO or on request from the Executive Board.
1.3 Asset allocation
The Fund is to be invested in equities, fixed income instruments and non-listed real estate.
NBIM CEO is delegated the responsibility for management of the Fund's overall exposure towards different asset classes, segments and countries. NBIM CEO shall manage the overall currency exposure of the Fund.
NBIM CEO shall provide funding to non-listed real estate investments according to set guidelines.
The Ministry of Finance has set the benchmark index for the Fund. The strategic and actual benchmark indices applicable to this mandate are described in appendix 1.
1.4 Delegation of investment mandate
Responsibility for investment management may be delegated subject to applicable restrictions and in accordance with the 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.
Within the framework of this Investment Mandate, NBIM CEO shall issue a separate investment mandate to NBREM CEO (“the Non-listed Real Estate Mandate”). NBIM CEO shall inform the Executive Board about any updates and revisions of the Non-listed Real Estate Mandate.
Investment activities shall at all times comply with relevant laws and regulations in the markets where the Fund is invested invests.
1.5 External managers
The Bank may use external managers and outsource operational functions, cf section 5 of regulation no. 1630 of 17 December 2009 on risk management and internal control in Norges Bank. The fee structure in agreements with external managers shall be designed to reflect the objectives for the management of the investment portfolio, taking into account the time horizon of the relevant investment strategies. The individual management agreements on performance-based fees shall be structured so that a major proportion of the positive excess return is retained, including provisions for caps on fees. (See Chapter 3, Management restrictions set by the Executive Board.)
2.RESPONSIBLE INVESTMENT MANAGEMENT
2.1 Responsible investment management
The Bank shall integrate its responsible management efforts into the management of the GPFG, cf. chapter 2. A good long-term return is considered dependent on sustainable development in economic, environmental and social terms, as well as well-functioning, legitimate and efficient markets.
The Bank shall establish a broad set of principles for the responsible management of the investment portfolio. In designing the principles pursuant to the first paragraph, the Bank shall emphasise the long-term horizon for the management of the investment portfolio and that the investment portfolio shall be broadly diversified across the markets included in the investment universe. The principles shall be based on the considerations of good corporate governance and environmental and social conditions in the investment management, in accordance with internationally recognised principles and standards such as the UN Global Compact, the OECD’s Principles of Corporate Governance and the OECD’s Guidelines for Multinational Enterprises. In its management of the unlisted real estate portfolio, the Bank shall, within the environmental field, consider, among other matters, energy efficiency, water consumption and waste management.
The Bank shall make decisions on the observation or exclusion of companies, and on the revocation of such decisions, in accordance with the Guidelines for observation and exclusion from the GPFG. The Bank shall inform the Ministry about decisions on exclusion of companies and the revocation of such decisions, cf section 3-1, third paragraph.
2.2 Environment-related investments
The Bank shall establish environment-related mandates within the limits defined in section 3-4. The market value of the environment-related investments shall normally be in the range of NOK 30-60 billion.
3.MANAGEMENT OF THE INVESTMENT PORTFOLIO
3.1 Investment universe
1. The Bank may invest the investment portfolio in financial instruments, real estate and cash deposits that are approved in accordance with section 4-10, but with the following restrictions:
a) The equity portfolio may be invested in equities listed on a regulated and recognised market place, listed securities that are equivalent to listed equities, depository receipts for such equities, and unlisted companies where the board has expressed an intention to seek a listing on a regulated and recognized market place;
b) The bond portfolio may be invested in tradable bonds and other tradable debt instruments, and depository receipts for such bonds;
c) The unlisted real estate portfolio may be invested in real estate or in equity and interest-bearing instruments issued by non-listed companies, fund structures and other legal entities whose primary business is the acquisition, development and management or financing of real estate. These investments may be made through Norwegian or other legal entities. Real estate means rights to land and any buildings thereon.
d) Financial derivatives and fund units only when naturally linked to investments in the equity, bond and unlisted real estate portfolios;
e) Other financial instruments only when passed to the investment portfolio as a result of corporate actions.
2.The Bank may not invest the investment portfolio in:
a) Securities issued by Norwegian enterprises, securities denominated in Norwegian kroner, real estate located in Norway or real estate companies, real estate funds or similar structures where the primary purpose is to invest in Norway. The same applies to covered bonds secured against assets in Norway. Norwegian enterprises mean enterprises whose head office is in Norway.
b) Securities that the Bank has excluded from the investment portfolio, cf. Guidelines on observation and exclusion from the GPFG section 2-5.
c) Fixed income instruments issued by governments or government-linked entities in the exceptional cases where the Ministry has barred such investments based on particularly large-scale UN sanctions or other international initiatives of a particularly large scale that are aimed at a specific country and where Norway supports the initiatives.
d) Unlisted companies and fund structures in a country with which Norway does not have a tax treaty or in a country from which Norway cannot request information relating to tax matters in accordance with other international agreements.
e) Unlisted infrastructure such as roads, railways, harbours, airports and other basic infrastructure.
3.2 Management restrictions set by the Ministry of Finance
1. The equity portfolio, cf. section 3-1, first paragraph letter a, shall constitute between 50 and 80 per cent of the investment portfolio.
2. The bond portfolio, cf. section 3-1, first paragraph, letter b, shall constitute between 20 and 50 per cent of the investment portfolio.
3. The unlisted real estate portfolio, cf. section 3-1, first paragraph, letter c, may constitute up to 7 per cent of the investment portfolio.
4. Net market value shall be used to calculate the respective shares in the first to third paragraphs. In such calculations, derivatives shall be depicted with the underlying economic exposure.
5. The Bank shall organise the management with the aim that the expected annualised standard deviation for the relative return between the investment portfolio and the actual benchmark index (expected tracking error) does not exceed 1.25 per cent, cf section 4-3, second paragraph.
6. The equity and bond portfolios shall be composed in such a way that the expected relative return is exposed to several systematic risk factors.
7. The Bank shall seek to take account of differences in fiscal strength between countries in the composition of government bond investments.
8. The Bank shall organise the management with the aim that high-yield bonds (credit rating lower than investment grade) do not exceed 5 per cent of the market value of the bond portfolio.
9. A credit rating is required for investments in debt instruments. All internal credit rating assessments shall be documented.
10. The equity portfolio may not be invested in more than 10 per cent of the voting shares in an individual company. Ownership in listed and unlisted real estate companies is exempt from this rule.
11. The unlisted real estate portfolio shall be well diversified geographically, across sectors and individual properties.
12. Leverage may be used with a view to performing the management assignment in an effective manner, but not with a view to increasing the investment portfolio’s exposure to risky assets in the equity and bond portfolios. Leverage may also be used in fund structures and by other legal entities with the aim of performing the management assignment in an effective manner, but such leverage may not be with a view to increasing the investment portfolio’s exposure to risky assets.
13. Reinvestment of cash collateral shall not take place with a view to increasing the investment portfolio’s financial exposure to risky assets.
14. Short selling is only permitted if the Bank has access to the securities through an established borrowing arrangement.
3.3 Management restrictions set by the Executive Board
3.3.1 Investment portfolio
The Executive Board shall set supplementary limits for risks that, based on experience, are not captured well by expected tracking error, including:
a. Limits for the minimum overlap between the equity and bond portfolios and the corresponding actual benchmark indices;
The overlap between actual portfolio and actual benchmark index must be at least 60 per cent for the equity portfolio and at least 60 per cent for issuers in the bond portfolio.
b. Credit risk limits at the individual issuer level and aggregated for the investment portfolio;
NBIM CEO shall organize the management with the aim that the maximum holding of a single issuer non-investment grade government bond does not exceed 2 per cent and that the maximum holding of other single issuer non-investment grade bonds does not exceed 0.5 per cent of the net asset value of the bond portfolio.
NBIM CEO shall organize the management with the aim that high yield bonds (credit rating lower than “investment grade”) do not exceed 5 per cent of the market value of the bond portfolio.
c. Liquidity risk limits;
A minimum of 7.5 per cent of the net asset value of the investment portfolio shall be held in treasury bonds issued by the governments of France, Germany, Japan, the United Kingdom and the United States of America.
d. Counterparty risk limits;
I. Potential future counterparty exposure shall not exceed 0.75 per cent of the net asset value of the investment portfolio for any single counterparty.
II. Counterparts to unsecured deposits shall have a minimum long-term rating of minimum “A” or the equivalent. Counterparts to collateralised instruments or contracts, other than central clearing counterparties, shall have a minimum long-term rating of at least “BBB” or the equivalent. Counterparts for pre-initial public offerings (pre-IPO) and central clearing counterparties need CEO approval.
III. 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.
e. Leverage limits;
Leveraging the equity and bond 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 the combined equity and bond portfolios.
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.
h. A limit for large expected negative deviations between the return on the investment portfolio and the actual benchmark index (expected extreme deviation risk);
NBIM shall organise the management with the aim that the annualised expected shortfall measured at 97.5% confidence level for the relative return between the investment portfolio and the benchmark index does not exceed 3.75 per cent.
The methodology for calculation of the expected shortfall shall be approved by the Executive Board.
In situations with extreme market volatility which may provoke a breach of the limit, NBIM CEO shall without undue delay recommend measures to be decided upon by the Executive Board.
i. Lending of securities is permitted, provided that NBIM ensures that adequate security is provided for the loan. Securities lent, including obligations to lend, shall not exceed 20 per cent of the net asset value of the investment portfolio.
j. Gross exposure of contracts for difference (CfD) shall not exceed 5 per cent of the net asset value of the investment portfolio.
k. When lending securities from the investment portfolio, one voting share in each company shall, as a minimum, always be retained to ensure that ownership rights can be exercised.
l. The issue of call options on individual securities that are not held in the Fund 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.
m. 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.
n. The Fund may only invest in government bonds from issuers approved by the Executive Board and as listed in Appendix 2. Changes to the list of approved issuers is subject to approval by the Executive Board according to the Executive Board’s framework for the approval of issuers of government bonds. NBIM CEO shall inform the Executive Board without undue delay and recommend measures to be taken in situations where issuers no longer fulfil the requirements in the framework.
o. The Executive Board shall establish a limit for how large a part of the voting shares in a single, listed real estate company the Fund may own.
Ownership in a single listed real estate company shall not exceed 30 per cent.
3.3.2 Non-listed real estate portfolio
The management of the non-listed real estate portfolio, ref. section 3.1.1. c) shall be well diversified in geography, sectors and properties. All weights shall be calculated by the use of net asset value of the non-listed real estate portfolio, unless otherwise is specified below.
The Executive Board shall also limit risk in the unlisted real estate portfolio by setting restrictions for:
a. Investments in countries;
The non-listed real estate portfolio shall be diversified in accordance with the following regional allocation:
1. United States of America: 30-70 per cent
2. United Kingdom:10-40 per cent
3. Germany: 0-20 per cent
4. France: 0-30 per cent
5. Japan:0-20 per cent
6. Other individual countries: 0-10 per cent
b. Investments in sectors;
The non-listed real estate portfolio shall be diversified in accordance with the following sector allocation:
I. Office: 40-80 per cent
II. Retail: 0-40 per cent
III. Logistics: 0-30 per cent
IV. Other: 0-10 per cent
c. Investment in emerging markets;
Investments in emerging markets shall not exceed 10 per cent.
d. Investments in real estate under development;
Investments in property under development shall not exceed 10 per cent of the net asset value of the investment in the non-listed part of the real estate portfolio.
e. Total debt ratio and the maximum debt ratio for individual investments;
The debt ratio of the non-listed real estate portfolio shall not exceed 35 per cent. No single investment shall have a debt ratio of more than 70 per cent.
f. Counterparts used for real estate daily cash management can be approved with a minimum rating requirement of BBB. Counterparts related to the acquisition of non-listed real estate needs separate approval. Guidelines should be in place to ensure that a documented credit and operational risk assessment has been performed.
g. The average economic vacancy rate shall not exceed 15 per cent. Properties under development shall be excluded from this calculation.
h. Investment in interest bearing instruments shall not exceed 25 per cent.
i. Net investment in one calendar year shall not exceed 0.2 per cent of the net asset value of the investment portfolio
3.3.3 The Executive Board shall establish a limit for how large a part of the investment portfolio a single external manager may manage:
Investment with a single external manager shall not exceed 0.5 per cent of the net asset value of the investment portfolio.
3.3.4 Co-investment with a single real estate investment partner shall not exceed 0.5 per cent of the net asset value of the investment portfolio.
3.3.5 Agreements with external managers shall contain provisions to ensure that the total annual fee paid per year per external mandate does not exceed a maximum amount, which shall not be above USD 30 million. Performance fees accrued above the maximum amount may be paid the following years, subject to the maximum annual pay out limit and excess return over the relevant time period.
3.3.6 Agreements with real estate asset management organisations or investment partners shall contain provisions to ensure that the total annual fee paid per year does not exceed a maximum amount, which shall not be above USD 30 million. Performance fees accrued above the maximum amount may be paid the following years, subject to the maximum annual pay out limit and excess return over the relevant time period.
3.3.7 The limits stated in the management restrictions set by the Executive Board according to the Management Mandate section 3-5 and subsequent changes to these limits shall be presented to the Ministry at least four weeks prior to their planned implementation, unless special circumstances indicate a shorter time limit.
3.4 Investment approvals of non-listed real estate
Investments and divestments above USD 750 million shall be approved by the Executive Board.
Investments that exceed the value as set out in the Executive Board’s mandate to the Real Estate Investment Board (REIB), investments in public to private transactions and investments that are of significantly different nature from regular non-listed real estate transactions shall be presented to REIB for review and approval.
3.5 Duties in the event of limits being exceeded
In the event that the limits and constraints defined in sections 3-4 and 3-5 are breached, the Bank shall without undue delay assess how its management can be brought back within the limits in an appropriate and cost-effective manner.
The Ministry shall be informed of any material breaches of the limits in the Ministry Mandate sections 3-4 and 3-5.
The Fund shall be invested in such a way that it is possible, with a reasonable degree of assurance, to manage the Fund within the quantitative risk limits as laid down by the Ministry of Finance and this Investment Mandate. In the event that investment restrictions in section 3.3 are exceeded, NBIM CEO shall notify the Executive Board and assess how the portfolio may be brought within the limits in an appropriate and cost-effective manner.
4. ENTRY INTO FORCE
This Investment Mandate enters into force 1 January 2019.
This Investment Mandate shall be submitted to the Executive Board for review annually.