Introduction Svein Gjedrem

The Norwegian government transfers its share of the country’s petroleum revenues to the fund. The government simultaneously withdraws the expected long-term annual real return on the fund averaged over a business cycle – or 4 percent of the fund.

The average annual real return since the management of the fund began is now 2.7 percent, up from just 1 percent a year ago. The figure reflects the recent recovery from the sharpest deterioration in capital markets since World War II. According to the fiscal guidelines, annual government petroleum revenue spending shall be 4 percent of the fund’s capital over time. With an unchanged risk profile, the average return may move back towards this level after a period.

Norges Bank has been entrusted with several tasks in the management of the fund. The Bank is to ensure prudent investment of fund capital in global capital markets. Inflows of capital are to be invested efficiently. As a shareholder, the Bank shall xercise ownership rights at more than 8 000 companies. Moreover, the Bank advises the Ministry of Finance on the fund’s longterm investment strategy. The Bank also performs active management within the limits laid down by the fund’s owner and the Bank itself.

These tasks are closely related. Our advice on strategy is based partly on close monitoring of the market as part of our active management, which facilitates the effective ownership rights at companies that we have analysed and followed closely over time. Cost control and management are also reinforced by operating an entity with a clear economic purpose.

Norges Bank’s Executive Board sets limits for all activities in the Norges Bank’s investment management unit NBIM. Oversight of investment management has been strengthened. The Executive Board introduced new principles for risk management in 2009 based on a common framework supplemented by more concrete risk limits in an investment mandate.

The size and scope of active strategies are determined by the Executive Board, which sets its own limits for risk in addition to those set by the Ministry of Finance. Our assessment after 12 years is that active management can make an important contribution to the fund’s returns in the long term, but must be subject to restrictions and closely monitored. The fund’s results for 2009 show that considerable values have been recovered and faster than we dared hope a year ago. The goal is to safeguard and build financial wealth for future generations through
a highly skilled investment management organisation.

The reporting on activities and accounts has become increasingly transparent over the past two to three years. Reporting has been expanded further this year, with additional and more detailed analyses of management results and risk evaluation along more dimensions.
The notes to the financial reporting are more extensive, especially with regard to risk and valuation. Remuneration figures for all members of NBIM’s management team are included. The Executive Board’s investment management rules will be published on NBIM’s website
with the fund’s holdings and voting at general meetings.

Oslo, 5 March 2010

Svein Gjedrem
Governor of Norges Bank and Chairman of the Executive Board