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Composition of the benchmark index for equities

Letter sent to the Ministry of Finance, 29 May 2020

10 June 2020

In letters dated 21 and 22 August 2019, the Executive Board of Norges Bank issued advice on the geographical distribution and composition of the benchmark index for equities in the Government Pension Fund Global (GPFG). The Executive Board recommended that the benchmark index for equities should continue to include all markets and companies in the FTSE Global All Cap, and that the weightings between individual markets should be adjusted towards free float-adjusted market weightings. In a letter dated 29 April, the Ministry asked Norges Bank to consider whether aspects of the current situation may indicate a need to revise the Bank’s advice.

The COVID-19 outbreak was not caused by factors in the financial markets, but has nevertheless resulted in substantial market movements. The first weeks of March saw marked falls in share prices. The decline was sharper, but no deeper, than during previous situations of market unrest. Share prices have made a strong recovery since the end of March, and the broad stock market as measured by the FTSE Global All Cap is currently down around 9 percent from the beginning of the year.

Returns have varied greatly in different sectors. The sector with the weakest return is Oil and Gas, down 35 percent since the beginning of the year. The strongest performance has been recorded by the technology sector, which is up approximately 6 percent during the same period. Returns have also varied considerably in different markets. While European share prices are down some 15 percent since the beginning of the year, US stock markets are down around 6 percent. The fact that sectors and economies are being impacted differently underlines the importance of broad diversification across sectors and markets.

The Executive Board’s advice to the Ministry regarding the composition of the benchmark index for equities was based on long-term assessments of expected returns and risk. The relevant risk for long-term investors is the risk of permanent losses. Even if it is assumed that the risk of permanent future losses has increased due to COVID-19, this will only be relevant to the question of geographical distribution if these permanent losses impact different regions differently. If this is to be given weight, it must also be assumed that any permanent losses are not reflected in market prices at the time the adjustment is made. The Executive Board cannot see that these conditions are met, and therefore sees no need to amend the advice given in the letters dated 21 and 22 August.


Yours faithfully

Øystein Olsen                                                                        Jon Nicolaisen