The Government Pension Fund is an instrument for general savings on the part of the State and, unlike traditional pension funds, is not ear-marked for specific liabilities. In view of the prospects of continued high petroleum revenues in the years to come and a responsible fiscal policy, the Fund is set to grow and have a very long investment horizon. The Fund is not subject to short-term liquidity requirements. Against this background, the Government Pension Fund will therefore, generally speaking, have a higher risk-bearing capacity than other funds that it is reasonable to compare it with.
There is broad political support for the Fund to be managed with a view to achieving the maximum possible return, at a moderate level of risk, so as to enable future generations to derive the maximum possible benefit from the wealth as well. The Government Pension Fund shall therefore have broad diversification of risk and a clear financial objective. There is also broad support for the ethical framework for responsible management of the Fund. Broad political support for the investment strategy for the Fund provides a democratic underpinning and represents an important contribution to maintaining the investment strategy over time, including in periods of major market fluctuations.
The investment strategy for the Government Pension Fund is developed with a view to maximising the overall return on the assets of the Fund, given the owners’ risk tolerance, the size and characteristics of the Fund, sound investment practice and fundamental governance principles.
The goal of good financial returns is closely linked to the wish to be a responsible investor. This responsibility entails ensuring that the Fund is managed in a way that promotes better functioning, legitimate and efficient markets and sustainable development in the broadest sense. A broadly diversified investor – often referred to as a universal owner – will benefit from making sure that good corporate governance and environmental and social issues are safeguarded. It follows from the task of manager of the public’s funds that widely shared ethical values must be taken into account. In some cases, the concerns of ensuring long-term financial returns and taking widely shared values into account will coincide, but not always. For example, the Fund will not invest in companies that are in gross breach of fundamental ethical norms, regardless of the effect this will have on returns.
The goal is for the Government Pension Fund – Global to be managed responsibly in a manner that takes good corporate governance and environmental and social issues into account. The Government requires that responsible management of the Fund is arranged in such a way that support is ensured among the population of Norway and legitimacy among market participants. One goal in the role as a responsible investor is to promote sustainable development in economic, environmental and social terms, and this is regarded as a precondition for good financial returns over time. The Government wants the Government Pension Fund – Global to promote good corporate governance in companies the Fund has an ownership stake in and to encourage the companies to respect fundamental ethical standards. The Government will continue to refrain from investing in companies that are in serious or systematic breach of fundamental ethical norms.
To meet these goals, the Ministry wants to integrate the goals of good corporate governance and consideration of environmental and social aspects into all parts of the management. This is in keeping with the United Nations’ Principles for Responsible Investments (PRI) that the Ministry of Finance as formal owner of the Fund has now adopted. Norges Bank, as operational manager, has been involved in the development of these principles and has supported them since they were launched in spring 2006.
However, the Fund is not suitable for safeguarding all the ethical commitments we have as a nation. The State has other political, regulatory and financial instruments at its disposal that in many cases will be better suited to ensuring fulfilment of these kinds of obligations than laying down constraints on the management of the Fund. We have the greatest chance of success, in the sense of exerting a positive influence, if the focus and instruments target the role the Fund has as a financial investor. This also means that the Fund shall not be used as a development aid or foreign policy instrument.
The investment strategy for the Government Pension Fund is expressed through the composition of the Fund’s strategic benchmark portfolio. The current benchmark portfolio consists primarily of listed equities and investment grade bonds. Equity investments represent ownership interests in the production of goods and services, and the value of such investments will therefore reflect expectations as to the future profits of businesses. Bond investments are investments in transferable loans that shall be redeemed by the issuer on a certain date together with a predetermined interest rate.
The Ministry of Finance has formulated a long-term investment strategy based on the assumption that the portions to be invested in various asset classes and geographical regions can be determined on the basis of assessments of expected long-term returns and risks. Importance has been attached to the premise that contributions to the diversification of the risk associated with the investments improve the risk-adjusted return. The Ministry of Finance has therefore chosen a broad representation of the world’s stock and bond markets in the benchmark portfolio it has set for the Government Pension Fund – Global. The indices making up the benchmark portfolio for the Fund include a representative selection of securities, and developments in these largely reflect market developments in the relevant countries.
The Ministry of Finance has determined a benchmark portfolio for the Government Pension Fund – Global and the Government Pension Fund – Norway. It has been decided to raise the equity portion of the Government Pension Fund – Global to 60 per cent, and it is currently being increased to that level. It has also been decided to invest up to 5 pct. of the Fund’s capital in real estate, which will result in a corresponding reduction in the fixed income portion.
The benchmark index for equities in the Government Pension Fund – Global comprises almost 7,700 companies across 46 countries, whilst the benchmark index for bonds comprises more than 10,000 individual securities across approx. 1,600 issuers in the currencies of 21 countries. By way of comparison, the benchmark index for equities in the Government Pension Fund – Norway comprises 196 companies in 4 countries, whilst the benchmark index for bonds comprises 270 individual securities across 62 issuers in the currencies of 6 countries.
More information about the Fund's investments strategy is available here.
