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Implementation review, strategy period 2017–2019

Letter to the Ministry of Finance, 2 June 2020

10 June 2020

Section 1-7 of the management mandate for the Government Pension Fund Global (GPFG) states that the Executive Board shall have a strategic plan for the execution of the management assignment. The Executive Board is required to prepare regular evaluations of the extent to which objectives in the strategic plan have been achieved. The Executive Board’s evaluation shall be submitted to the Ministry.

The 2017–2019 strategy plan was adopted by the Executive Board on 8 February 2017, and then submitted to the Ministry of Finance. The Executive Board prepared a preliminary evaluation of work done during the previous strategy period as part of its work on the strategy plan for 2020–2022, which was published on 8 October 2019.

The evaluation for the period 2017–2019 shows that management was mainly carried out in accordance with the goals in the strategy plan, although some adjustments were made to the Bank’s management strategy. During the period, the Bank also implemented several changes in the Ministry of Finance’s investment strategy.

A detailed account of the work done to implement the capital management strategy as defined in the 2017–2019 strategy plan is enclosed.

Norges Bank manages the GPFG with the aim of achieving the highest possible return over time, within the framework of the mandate issued by the Ministry of Finance. The Bank seeks to achieve this goal in the most secure, cost-effective, responsible and transparent manner possible.

The Executive Board has given particular emphasis to the following in its evaluation of the period:


The GPFG’s annual return before the deduction of management costs total 8.57 percent during the strategy period. The return is compared to the return on a benchmark index defined by the Ministry of Finance. The annual return was 0.18 percentage point higher than the return on the benchmark index during the period.

The Executive Board issues an assessment of the results in connection with the Bank’s annual report. The Executive Board is satisfied that the return over time has been higher than the return on the benchmark index against which the return is measured.

The Bank pursues a variety of investment strategies in its management activities. Since 2013, these strategies have been grouped into three main categories: fund allocation, security selection and asset management. The different strategies are complementary and build on the fund’s special characteristics as a large, long-term investor with limited short-term liquidity needs.

The Executive Board emphasises the importance of assessing the performance of the fund as a whole and over time. Over the seven-year period since 2013, the different strategies produced an annual excess return before management costs of 0.19 percentage point. The Executive Board is satisfied that the total return exceeded the return on the benchmark index during the period.

One key provision in the mandate from the Ministry of Finance requires Norges Bank to manage the fund with the aim that expected relative volatility (tracking error) does not exceed 1.25 percentage points. The Executive Board is pleased that, over time, the management of the GPFG has achieved an excess return with limited utilisation of this limit. As at the end of 2019, expected relative volatility was 0.33 percentage point.

Reports on the impact of the three main groups of strategies on the excess return during both the previous strategy period and the full 2013–2019 period show that asset management and security selection contributed positively to the excess return. Fund allocation had a negative effect on the excess return.

The Executive Board emphasises that fund allocation comprise a diverse group of sub-strategies. Some of the sub-strategies seek to facilitate a higher excess return, while others serve the purpose of increased diversification or cost-effective adaptation to changes in the investment universe. Allocation also encompasses deviations from the benchmark index resulting from various requirements in the mandate, including the requirement to take account of differences in financial strength between countries.

Norges Bank’s real estate investments aim to improve diversification. Results are reported as part of fund allocation. The real estate investments have a long-term perspective, and measuring the effect on the GPFG’s total return and risk requires data covering a longer period of time. In the 2019 publication on return and risk, the actual return since 2011 was compared to a hypothetical portfolio excluding real estate investments. The calculations indicate that the real estate investments may have had some positive effect on the return-risk ratio. However, the calculations relate to a short period of time, and incorporate a number of assumptions. The results must therefore be treated with caution.

The Executive Board emphasises that the design of the strategies are adjusted and refined over time. The reference portfolio, which also falls into the allocation category, is defined by Norges Bank as a starting point for the management of equities and fixed income. The purpose of the reference portfolio is to achieve the best possible long-term return-risk ratio for the GPFG within the framework of the management mandate. In line with the goals in the strategy plan, the Bank made several adjustments to the reference portfolio during the previous period. This illustrates the adjustment and refinement of the design of the strategies over time. A further example is exposure to systematic risk factors. The market environment for risk factor strategies was challenging throughout the strategy period 2017–2019. The Bank simplified how such strategies are implemented towards the end of the strategy period.

Norges Bank will consider further adjustment of the strategies based on gained experience in the present strategy period.

Management- and transaction costs

The Executive Board attaches importance to cost-effective management, which also supports the goal of achieving the highest possible net return. In the strategy plan, the Executive Board expressed the expectation that internal management costs should be kept below 0.05 percent. The actual annual internal management costs amounted to just under 0.04 percent of the fund capital during the period. The Executive Board has a strong focus on the development of the GPFG’s administrative costs.

The detailed review shows that the Bank implemented several measures which reduced the GPFG’s transaction costs, particularly in the equities management context.

Implemented changes to the mandate issued by the Ministry of Finance

The GPFG is invested in equities, fixed income and real estate. During the strategy period, the Bank made adjustments to incorporate several changes to the mandate issued by the Ministry of Finance.

In 2017, the Ministry of Finance decided to increase the proportion of equities in the GPFG benchmark index to 70 percent. The Bank phased in the increased equity portion over the course of the strategy period. The Bank reported on the financial consequences of this step in a letter to the Ministry of Finance dated 24 August 2019.

The guidelines on real estate investment in the mandate issued by the Ministry of Finance were also amended. Real estate was excluded from the benchmark index at the beginning of the period. Since then, Norges Bank has invested in real estate within the limits for deviation from the GPFG benchmark index as defined in the mandate. The Bank finances real estate investments by selling a combination of equities and fixed income. During the period, the method for deciding which equities and fixed income instruments should be sold to finance real estate investments was refined to support the objective that the real estate investments should help diversify the GPFG’s total risk.

The Bank’s real estate investment strategy

In addition to implementing the changes to the mandate issued by the Ministry of Finance, the Executive Board adjusted the strategy for real estate management activities in the previous strategy period.

The strategy plan 2017–2019 expressed an expectation that the real estate investments would total 4 percent of the fund capital by the end of 2019. In February 2019, the Executive Board approved changes to the real estate strategy. In developing the strategy, the Executive Board emphasised factors such as the experience gained of real estate investment since 2011 and changes in the market for listed real estate investments. In February 2019, the Executive Board decided to target a real estate allocation of around 3-5 percent of the GPFG, with no restrictions on the split of this allocation between listed and unlisted real estate. The real estate portfolio should be broadly diversified across real estate sectors, with an emphasis on cost efficiency and investments that require limited resources. The investments will be concentrated in a few strategic cities. Reference is made to Norges Bank’s letter to the Ministry of Finance dated 7 February 2019.

Real estate investments will remain an important part of the Bank’s investment strategy for the GPFG, and NBIM will be a large real estate investor in the coming years. In the 2020–2022 strategy plan, the Bank is targeting a portfolio of listed and unlisted real estate   5 percent of the GPFG. Except in the logistics sector, the investments will be concentrated in eight cities.

In view of the changes made to the real estate strategy in 2019, the Executive Board no longer considered it appropriate to organise the management of unlisted real estate separately. The real estate organisation was therefore integrated with Norges Bank Investment Management as of 1 April 2019. The Executive Board is satisfied with the way the organisation has implemented these changes.

External management

The proportion of the portfolio managed by external managers was lower than expected. The strategy plan included the expectation that the proportion of external management would increase to 6 percent of the GPFG, whereas the actual proportion was 3.9 percent at the end of the period. The external management percentage fell due to the termination of external environmental mandates and a reduction in the number of other mandates linked to emerging markets and small companies. These steps were taken following an evaluation of prevailing market conditions and the overall cost profile. In addition, emphasis was given to the fact that in-house management of environmental mandates ensures an integrated approach to the question of which investments should be included in these mandates.

There were 83 external mandates as at the end of the period. All of these were specialised country mandates.

Responsible investment

A responsible investment focus is integral to the Bank’s management activities. Responsible investment is intended to support the GPFG’s objective of promoting the long-term financial growth of its investments and reducing financial risk related to environmental and social conditions. The Executive Board considers that the Bank’s work in the areas of standard-setting, active ownership and risk management became more systematic and targeted during the previous strategy period.

The Bank reports regularly on its work in its annual reports. In addition, the Bank has published dedicated annual publications on responsible investment efforts since 2015.

Effective control and new model for IT service delivery

The control framework was strengthened during the period through specialisation of the compliance function and automation of control activities. This is in line with the aim set out in the strategy plan. A new model was adopted for delivery of IT services during the period to secure better control, increased IT security and improved services. This project was completed in 2019. The outsourced solution has been replaced by specialist suppliers and cloud-based IT infrastructure. This is in line with the goals in the strategy plan concerning improvement of the investment platform. The Executive Board is pleased that the project was completed as planned and on budget.

Yours faithfully

Øystein Olsen                                                                       Jon Nicolaisen

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