Returns have fluctuated considerably since the Petroleum Fund made its first investments in the equity markets in 1998. One important aspect of the management strategy defined by the Ministry of Finance is to ensure that equity exposure remains fairly stable. This has implied fairly large equity purchases during periods when prices declined sharply. So far, this long-term strategy has proved to be very profitable.
As expected, returns on fixed income instruments have fluctuated considerably less. Returns have only been negative in 1999. In recent years, returns have been relatively high. The portfolio has benefited from the short-term effect of value changes associated with the fall in international interest rates. It is not natural to expect this to continue. The yield on fixed income instruments is very low seen in a historical perspective.
So far, the average annual real return on the Petroleum Fund has been 4 per cent after deducting management costs. This is equivalent to NOK 182 billion, disregarding the effect of the krone exchange rate.
Norges Bank's management performance is measured against the equity and fixed income benchmarks that have been stipulated by the Ministry of Finance. In 2004, the excess return was 0.53 percentage point. This is the seventh consecutive year since 1998 that Norges Bank has achieved an excess return. After deducting the additional costs related to active management, the average annual excess return was 0.40 percentage point.
Considering excess return in relation to additional costs is not sufficient to evaluate the profitability of active management. It is also important to assess the impact of active management on risk. Until now, Norges Bank's active management has not appreciably increased the risk for the Petroleum Fund compared with pure index management. This is because Norges Bank has chosen a strategy that entails taking a very large number of active independent positions.
The management of the Petroleum Fund is an important and demanding challenge for Norges Bank. The Bank places considerable emphasis on control and risk management. The Bank also seeks to minimise costs in connection with the phasing-in of new capital into equity and fixed income markets.
As in previous years, the management of the Petroleum Fund in 2004 has been conducted without significant breaches of the guidelines laid down by the Ministry of Finance. Norges Bank seeks to be transparent and provide comprehensive information on the Fund management. We hope that this annual report provides our readers with useful insight into the management of the Petroleum Fund