The result for 2001 is a reminder that the fluctuations in global capital markets also have an impact on the return on the Petroleum Fund. Equities fluctuate far more than fixed income instruments. It is precisely the risk that equities may generate poor returns in periods that enables investors to achieve a higher return in the long term on equities than on investments that vary less in value.
The negative return on equities in the past two years must be considered bearing in mind that the average annual rise in market prices was a full 20 per cent in the years 1995 to 1999. It is still uncertain whether prices have settled at a reasonable level in relation to enterprises' expected earnings. Price developments in the time ahead will depend strongly on global economic growth.
Despite two negative years, the cumulative return on equities since the Petroleum Fund first invested in equities in 1998 is 23 per cent. This is approximately the same as the return on fixed income instruments. During this period, the real return less management costs has been 3.6 per cent, measured as an annual average. There are hardly grounds for expecting that the high return figures recorded in capital markets in the 1990s will be repeated in this decade.
The return on the Petroleum Fund depends mainly on the management framework stipulated by the Ministry of Finance. Norges Bank's contribution to the return is measured continuously by comparing results with a benchmark portfolio defined by the Ministry of Finance. Norges Bank has outperformed the benchmark each year. In the period 1998 to 2001, our annual average excess return was 0.39 per cent. The excess return in 2001 was appreciably weaker than previous results.
The year 2001 was also characterised by a large supply of new capital for management. A total of just over NOK 250 billion was invested in international capital markets. Norges Bank has placed great emphasis on investing the capital in a prudent, cost-effective, manner.
In this year's Annual Report, Norges Bank presents a detailed account of its management results. A description is also provided of the management process during the past year. The background to changes in equity management and plans for investment in fixed income instruments with credit risk are described in separate articles.
Svein Gjedrem, Central Bank Governor
Knut N. Kjær, Executive Director, Norges Bank Investment Management