Investment strategy decisions for the GFPG

The equity share, investments in unlisted infrastructure, as well as guidelines for government bonds, are key issues addressed in the white paper on the management of the Fund in 2016.

The equity share
The equity share of the strategic benchmark index is the one decision with the greatest impact on expected risk and return in the Government Pension Fund Global (GPFG). The equity share is currently 62.5 percent. The expected return on equities is higher than on bonds, but at the same time, equities entail more risk.

– The Government is proposing to increase the equity share to 70 percent, based on an overall assessment. A higher equity share requires broad political consensus, as well as the ability to remain committed to the investment strategy, also when the Fund fluctuates in value, says the Minister of Finance, Siv Jensen.

The overarching objective for the Fund is to achieve the maximum possible return, given a moderate level of risk. The Government assumes that the risk with an equity share of 70 percent will be acceptable overall. The proposal is not based on an assessment of market prices and timing, nor on a lower estimate for the real return of the Fund (see also press release of 16 February).

Unlisted infrastructure
– Whether the Government Pension Fund Global should be permitted to invest in unlisted infrastructure investments is not a climate issue, but foremost a question of which risks the Fund should be exposed to. A transparent and politically endorsed sovereign fund like ours is not well suited to carry the particular risks posed by such investments, compared to other investors. The Government is proposing to not permit such investments at this time, says Siv Jensen, Minister of Finance.

The white paper discusses the special challenges involved in investing in unlisted infrastructure. This discussion addresses political, reputational and regulatory risk based on, amongst other things, a report from McKinsey. The report notes that this asset class is broad in scope, from power generation and airports to social infrastructure such as hospitals and prisons. It also notes that investments in unlisted infrastructure are complex, vary considerably from project to project, and require specialised expertise in several parts of the investor organisation, including at the board level.

According to a letter from Norges Bank, the risks can be limited by investing in sectors like energy, communication and transport in mature markets in Europe and North America.

– There is a broad political consensus that the Fund has a financial objective and should not be used as a tool for foreign or climate policy, says Siv Jensen Minister of Finance.

Guidelines for government bonds
In its deliberation of the white paper on the management of the Fund in 2015, the Storting’s Standing Committee on Finance and Economic Affairs requested that guidelines for the Fund’s investments in government bonds be considered, as a tool for Norges Bank in its assessment of financial risk. 

Norges Bank manages the GFPG within a mandate laid down by the Ministry of Finance. The financial risk of government bond investments is adequately addressed in the current mandate, and the Bank’s subsequent implementation. The Ministry proposes that the mandate be amended to require Norges Bank’s Executive Board to approve each state that issues government bonds, in addition to a requirement to report on procedures and systems for such approval.

– The GPFG has a good framework for handling the financial risk associated with government bond investments. This is strengthened further by the proposed changes, says Siv Jensen, the Minister of Finance.

Oil and gas stocks in the GPFG
The 2017 white paper on Long-term perspectives on the Norwegian economy discusses how the Norwegian economy can become less vulnerable to a permanent decline in oil and gas revenues. Divestment of the equities held by the GPFG in oil and gas companies is seen as a measure that is neither suited nor targeted for this purpose.

– A primary objective for the government has been to make the Norwegian economy less dependent on oil, and more responsive to change. First and foremost, this requires a qualified labour force and a productive business sector. Divestment of the oil and gas equity holdings of the Fund is a digression, and makes us no less vulnerable to a permanent decline in petroleum revenues, says Siv Jensen, Minister of Finance.