The mandate to the expert group

The Ministry of Finance plans to undertake a review of investments in real estate and infrastructure, to be presented to the Parliament in the spring of 2016. An important part of the review will be a report made by a small group of acknowledged experts with competencies both from academia and asset management practice.

The purpose of the Government Pension Fund Global (GPFG) is to facilitate government savings to finance the National Insurance Scheme’s expenditure on pensions and support long-term considerations in the use of petroleum revenues. The objective for the Fund’s investments is to maximise returns subject to a moderate level of risk.

In 2008, the Ministry decided to permit investment of up to 5 percent of the GPFG in real estate, in line with the conclusion from the deliberation by the Storting of Report No. 16 (2007-2008) to the Storting – The Management of the Government Pension Fund in 2007. The Standing Committee on Finance and Economic Affairs unanimously endorsed the proposal to permit real estate investments in the GPFG, cf. Recommendation No. 283 (2007-2008) to the Storting. The development of the real estate portfolio entails a corresponding reduction in the fixed income portion of the benchmark index.

2.2 percent of the Fund was invested in real estate as at yearend 2014, up from 1.0 percent at the beginning of the year. Part of the increase in the value of the real estate portfolio in 2014 was effected by way of Norges Bank transferring the investments held in 11 listed real estate companies from the equity portfolio to the real estate portfolio. Norges Bank notes, in its annual report for 2014, that properties to which the Bank would like to achieve exposure are owned by listed companies in many of the relevant real estate investment markets. The Bank has transferred part of the real estate investments from the equity portfolio to the real estate portfolio to ensure a broader real estate portfolio and to exploit the advantages of the Fund within a flexible real estate mandate.

The mandate set by the Ministry for the GPFG permits the real estate portfolio to be invested, inter alia, in equities of listed real estate companies in addition to in unlisted real estate. Investments in listed real estate equities were specifically examined in Report No. 27 (2012–2013) to the Storting – The Management of the Government Pension Fund in 2012. It was noted that analyses of historical data indicate that there are no material differences in the long-term return and risk characteristics of comparable listed and unlisted real estate investments. Moreover, listed real estate companies account for a large portion of the property market in many sub-markets and countries. The unlisted and listed markets supplement each other and constitute, when taken together, the overall property market. The Ministry also noted that the return measure for the real estate portfolio; a real estate index from the index provider International Property Databank (IPD), is based on developments in the value of unlisted real estate, and that a significant expansion of listed real estate investments will make it appropriate for the Ministry to consider alternative return measures for the real estate portfolio.

Norges Bank has made substantial real estate investments in Europe and the US over the last few years. The Bank has stated, in its strategy plan for 2014-2016, that it is aiming to invest one percent of the Fund in real estate each year for the next two years. This means that such investments may approach the 5-percent upper limit within a few years.

Norges Bank has previously recommended that up to 10 percent of the GPFG may be invested in real estate and infrastructure, cf. letter of 20 October 2006. However, the mandate set by the Ministry for the management of the GPFG does not permit unlisted infrastructure investments. This distinguishes the GPFG from other comparable funds. A survey from the analysis firm CEM Benchmarking shows that the portions invested by large comparable funds in unlisted infrastructure and real estate in 2013 were 3 percent and 8 percent, respectively. Unlisted infrastructure investments are made within areas like transport, energy supply, water, sewage, waste handling, telecommunications and government buildings. The infrastructure market represents, inter alia, investment opportunities within renewable energy, such as sun farms, wind farms and hydropower.

Unlisted infrastructure investments were examined in Report No. 15 (2010–2011) to the Storting – The Management of the Government Pension Fund in 2010. The Ministry noted that there are certain similarities between real estate investments and infrastructure investments. It was also emphasised that the Ministry and Norges Bank are in the process of accumulating experience from investments in the largest and most developed unlisted marked; the real estate market. It was decided not to permit infrastructure investments. The Ministry noted that special characteristics of the GPFG meant that it would be appropriate to revert to the matter of unlisted infrastructure at a later stage. The Report stated the following:

 «The markets for private equity and infrastructure are developing. A new review will be able to build on new research results and more detailed assessments of what can be achieved by exploiting the Fund’s size and long-term nature. The experience which is now being gained through investments in private property investments will also be relevant.»

The Ministry reviewed Norges Bank’s management of the GPFG in Report No. 19 (2013–2014) to the Storting – The Management of the Government Pension Fund in 2013. The purpose was to examine whether changes to the mandate of Norges Bank can improve the ratio between expected return and risk compared to that of the benchmark index established by the Ministry. The Ministry obtained analyses and advice from Norges Bank and an expert group comprising Andrew Ang, Michael Brandt and David Denison. Both Norges Bank and the expert group recommended, inter alia, changes in how real estate investments and any other unlisted investments are regulated in the mandate for the management of the GPFG.

Norges Bank noted, in a letter of 31 January 2014, that the current return measure for the real estate portfolio; the so-called IPD index, suffers a number of shortcomings, as does other indices for private investments. The Bank stated, inter alia, that:

«The composition of the index does not necessarily reflect investment opportunities, but will depend on which owners choose to report return data to the index supplier. The index is not replicable. It will not be possible for the individual investor to buy a small share of all of the properties included in the index. Our experience is also that the IPD index is ill-suited as an instrument in our public communication of the results of our management of the fund's real estate investments.»

The Bank proposed that the whole Fund should be benchmarked against indices of public equity and fixed income and that the bank sets the return measure for real estate investments.  Moreover, it was proposed that the real estate investments be included in the basis for calculating the limit on deviations from the benchmark index as measured by expected tracking error, and that such limit be increased from 1 percent to 2 percent.

In its report, the expert group proposed a so-called opportunity cost model for delegation between the Ministry of Finance and Norges Bank. Such a model is also used by other large funds, including the Canadian pension fund CPPIB and the Singaporean sovereign wealth fund GIC. This model implies that there is no fixed portion of the capital earmarked for investment in real estate and other unlisted markets. It is instead delegated to the asset manager to consider such investments, in each individual case, against the opportunity return from making a corresponding investment in an equity and fixed income portfolio. The advantage of such a model is that it can be used across assets classes, and that the asset manager is better placed to exploit special characteristics of the Fund, as well as accumulated advantages. By special characteristics are meant structural qualities of the Fund, such as size and investment horizon. By accumulated advantages are meant expertise and infrastructure developed over time on the part of the asset manager.

At the same time, it is noted in the report from the experts that the said opportunity cost model is challenging to implement in practice, and that a clear and sound governance structure is a prerequisite. The expert group nonetheless believes that the Fund is well placed to implement such model in a sound manner. The expert report does not address the details of how such model should be introduced in practice. The Ministry discussed the proposals of the expert group in last year’s Report to the Storting, and stated that the Ministry will be examining the received advice in more detail.


The group shall prepare a public report and give a presentation of the report. The theme for the report is how investments in real estate and infrastructure may improve the trade-off between risk and return of GPFG and how the Ministry should regulate such investments in the mandate to Norges Bank.


The report should address the following issues:


  1. Should the mandate for GPFG  open  for private infrastructure investments and should the share of the Fund´s capital invested in real estate be increased?

The group’s assessments and recommendations should be based on a review of how increased investments in private real estate and infrastructure may improve the trade-off between risk and return of the Fund, and include a discussion of:

  • Value added from diversification, factor exposure, time variation in risk premia and security selection relative to investments in public equity and fixed income.
  • Risk exposure, including exposure to macroeconomic variables like inflation and economic growth, on short and long horizons relative to investments in public equity and fixed income
  • GPFG’s comparative advantages or disadvantages in this area


  1. How should the Ministry regulate real estate and infrastructure investments in the management mandate to Norges Bank and how should Norges Bank´s performance be evaluated?

The group’s assessments should be based on a review of the opportunity cost model as recommended by Ang, Brandt and Denison (2014) compared to the current mandate for GPFG, and give recommendations on:

  • Benchmarking, including a discussion of the strength and weaknesses with the use of a public benchmark versus indices of public and private real estate and infrastructure assets.
  • Risk regulation, including a discussion of how absolute and relative risk should be measured, managed and regulated. 
  • Reporting requirements, cf. recommendations in the report from Ang, Brandt and Denison´s (2014).
  • Performance evaluation, including a discussion of possible risk adjustments and what expectations the Ministry should have to excess return.

To the extent that the Ministry decide to open up for infrastructure investments, the mandate will also include an opening up for unlisted infrastructure for renewable energy and infrastructure in emerging markets. These investments should be subject to the same financial requirements as the other investments of the GPFG. The report should describe these markets segments, including size and share of the total market for infrastructure as well as discuss in general the trade-off between risk and return for such investments.

The group’s assessments should be based on acknowledged finance research (theory and empirical) and similar funds management, results and experience from investments in real estate and infrastructure. The assessments should further be based on a perquisite that the Fund’s absolute market risk level should be approximately as today.

The report should be presented no later than end of November 2015.

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