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Annual report 2002

International equity prices fell for the third consecutive year in 2002. The decline since the peak in the winter of 2000 is the sharpest since early in the 1930s. In a historically turbulent year, the return on the Petroleum Fund’s total portfolio of equities and fixed income instruments was negative, at -4.7 per cent. For the last five years, the average annual real return after management costs has been 2.5 per cent

High returns on fixed income instruments contributed to curbing the effects of the sharp fall in equity prices in 2002. The marked decline in interest rates for the major currencies reflects the same economic background as the fall in equity prices and has resulted in a temporary rise in prices for fixed income instruments. Interest rates can be expected to return to a normal level at a later stage.

The Fund’s long-term strategy, which is stipulated by the Ministry of Finance, largely determines the distribution of equities (around 40 per cent) and fixed income instruments (around 60 per cent). The strategy is essentially in accordance with advice from Norges Bank.

Because the horizon for investments is very long the Petroleum Fund can cope with wide fluctuations in returns better than most other large investors in the global capital market. It is precisely because of the willingness to take risk that investors are able to achieve higher returns over time on their equity investments. This is confirmed by analyses of historical data from stock markets around the world.

An important feature of the Petroleum Fund is that substantial new capital is transferred to the Fund every month. The management strategy specifies that this capital shall be used to purchase equities when the return on equities has been weaker than the return on fixed income instruments. In the same way, fixed income instruments are purchased when the return on fixed income instruments has been lower than the return on equities. In this way, the risk of trading equities when market conditions are unfavourable is counterbalanced over time.

Norges Bank’s performance is regularly measured against a benchmark defined by the Ministry of Finance. In 2002, the excess return achieved by Norges Bank was 0.25 percentage point. This is the fifth consecutive year since equities were introduced in the portfolio in 1998 that Norges Bank has achieved an excess return. The average excess return in the five-year period has been 0.41 percentage point.

Substantial shifts were made in the fixed income portfolio in 2002 as a result of the Ministry of Finance’s decision to change the investment strategy. Government bonds worth more than NOK 130 billion were sold in order to purchase non-government-guaranteed bonds, including corporate bonds. The shift will continue in 2003. Norges Bank has placed emphasis on keeping the transaction costs associated with these purchases to a minimum.

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