Equity pulls Norwegian oil fund higher

Jonathan Boyd
clock • 3 min read

Equities held by Norway’s Government Pension Fund Global, the so-called Oil fund, accounted for the majority share of returns made over the past year, the fund’s manager Norges Bank Investment Management has reported.

Equity returns hit 19.4%, far higher than unlisted property, 7.5%, and fixed income, 3.3%. Averaged out, the fund reported an overall return of 13.7%, or NOK1,028bn (€106.8bn) through 2017.

The fund passed key milestones over the year: on 26 April, 2017, the market value passed NOK8trn (€831bn), and on 19 September it reported a market value over $1trn equivalent.

The reported return was 0.7% higher than the benchmark used.

Øystein Olsen, chairman of the Executive Board of Norges Bank, said: “The Executive Board is satisfied that the return both in 2017 and over a longer period has been good and higher than the return on the benchmark index.”

Yngve Slyngstad, CEO of Norges Bank Investment Management, added: “The fund’s cumulative return since inception has passed 4,000 billion kroner (€416bn). One out of four kroner return was generated in 2017, after a very strong year for the fund. Again, our equity investments returned strongest with a return close to 20%.”

Currency changes helped, as a weaker NOK against several key currencies increased the fund’s value by NOK15bn. The reported net withdrawal from teh fund was NOK61bn (€6.3bn).

As of 31 December, the fund’s market value was NOK8,488bn (€883bn), of which 66.6% was invested in equities, 2.6% in unlisted property, and 30.8% in fixed income.

According to the full annual report (available here: https://www.nbim.no/contentassets/49715a01ed684b1686ff3c017f1efa12/annual-report-2017—government-pension-fund-global.pdf ) annual management costs paid in the 2013-2017 period averaged 0.06%.

“Viewed over a longer period, management costs have risen more slowly than assets under management. At the same time, the management of the fund has become more complex. This illustrates that Norges Bank has realised economies of scale,” the report states.

Video highlights of the report (in Norwegian)

The Government Pension Fund Global is committed to an ESG stance, and will actively de-select holdings if the related companies are deemed not to meet the relevant criteria. That policy will persist.

Private equity

The annual report does not go into detail on how the fund might make greater use of private equity investments in future.

This was floated in a letter to the Norwegian Ministry of Finance on 8 January this year, in which Norges Bank responded to a 29 June, 2017 letter from the Ministry asking it to consider whether an adjustment should be made to allow the fund to invest in unlisted equities.

Besides noting analysis on the risk/reward merits of such investments, Norges Bank noted that the existing mandate, which allows participation in primary markets (IPOs) had rarely been used, because of the need for companies to also meet the other selection criteria applicable to any investment held. It also added that should the mandate be adjusted: “To begin with, the Bank will consider investing in or alongside private equity funds. Such a strategy will require the Bank to have good manager evaluation skills.”

Overall, however, the conclusion is that such investments ought to be allowed.

“On balance, Norges Bank believes that the risk associated with unlisted equity investments could be adequately constrained in the management mandate. Investments in unlisted equity lie closer to the Bank’s existing investment activities than was the case when the Ministry first permitted investments in unlisted real estate. Unlisted equity investments within the constraints outlined in this letter will probably not serve to increase the complexity of  management significantly beyond that which already follows from parts of the fund being invested in unlisted real estate. The Bank’s recommendation is that the Ministry permits investments in unlisted equity in its definition of the investment universe.”

Currently, therefore, Norges Bank, and its asset management arm NBIM are awaiting confirmation that unlisted equity investments can be pursued.

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