Emerging equity markets and the Petroleum Fund's benchmark portfolio

Norges Bank submitted the following letter to the Ministry of Finance on 30 August 2000

30 August 2000

Introduction

In a submission of 16 March 1999, Norges Bank discussed the requirements that should be met before new countries are included in the Fund's investment universe. The Bank's considerations were based on the purpose of the Fund, which is to maximise future international purchasing power, given an acceptable risk level.

An evaluation of specific countries was sent to the Ministry of Finance in a submission dated 26 August 1999, and was based mainly on the general criteria described in Norges Bank's first submission on emerging markets. Following an evaluation of the various countries on the basis of general criteria, a core of emerging markets that fulfilled the minimum requirements remained. These were Brazil, Mexico, Greece, Turkey, Taiwan, Thailand and South Korea. These countries were included on the Petroleum Fund's country list on 1 January 2000.

In the National Budget 2000, it was stressed that it was not regarded as appropriate to include the new countries in the Fund's benchmark portfolio from the date that the investment universe was expanded. The Ministry of Finance would need more time to consider this matter, among other things in order to identify indices appropriate for inclusion in the benchmark portfolio. The Ministry aimed to complete the work by the end of 2000.

In this submission, Norges Bank considers whether the seven emerging markets should be included in the Petroleum Fund's benchmark portfolio. Before a new country is included in the benchmark portfolio, its clearing and settlement systems must satisfy certain minimum requirements. In addition legislation and supervisory systems must function satisfactorily, and the markets must be liquid. Chapter 2 commences with some comments regarding the clearing and settlement systems of emerging economies. The same chapter provides an account of the historical performance and market risk associated with the individual markets. Chapter 3 stresses that the most important considerations concern whether the trade-off between expected return and risk can be improved by including new countries in the benchmark portfolio. Chapter 4 provides a conclusion.

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