Norges Bank Government Pension Fund Global annual report for the year ended December 31, 2015.
2015 in figures
The Government Pension Fund Global returned 2.7 percent, or 334 billion kroner, in 2015.
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Equity investments returned 3.8 percent, while fixed-income investments returned 0.3 percent. Investments in real estate returned 10.0 percent.
The fund’s asset allocation at the end of the year was 61.2 percent equities, 35.7 percent fixed income and 3.1 percent real estate.
The return on equity and fixed-income investments was 0.5 percentage point higher than the return on the benchmark indices the fund is measured against.
The fund’s market value was 7,475 billion kroner at the end of 2015, up from 6,431 billion kroner a year earlier.
Government Pension Fund Global – Investing for the long term
The Government Pension Fund Global is a savings vehicle for future generations. Its market value has increased rapidly in recent years. With a fund this large, we have to expect considerable fluctuations in value.
The Government Pension Fund Global turns petroleum revenue into financial wealth. This wealth belongs to the people of Norway, and Norges Bank has been tasked by the Ministry of Finance to manage the fund on their behalf. Our role is to provide long-term and professional management of the fund so that Norway’s oil wealth benefits both current and future generations. The objective for our investments is to achieve the highest possible international purchasing power over time with an acceptable level of risk.
The fund returned 2.7 percent in 2015. Since 1998, the average annual return has been 5.6 percent, which is 0.26 percentage point more than the return on the benchmark.
To make a return, we have to take risks, and we have to expect substantial variations in the fund’s value. The fund has a particularly long investment horizon and therefore capacity to bear short-term risk. This is behind the choice of a relatively high allocation to equities.
In 2015, Norges Bank advised the Ministry of Finance on the further development of the investment strategy for the fund. We believe that a broader investment universe could help improve the trade-off between risk and return. In 2015, Norges Bank issued advice on the investment strategy of the fund. The bank recommended to increase the limits for deviations from the benchmark index, rebalancing of the equity share and investments in and policy tools for coal companies.
The Bank attaches great importance to transparency about the fund’s management and results. The annual report is now being supplemented with extensive reports in areas where we consider it important for the public to have more insight. There is also much information on the fund’s website. We are very keen for our reporting and disclosures to provide a broad picture of how we fulfill our management mandate.
Oslo, 9 March 2016
Chairman of the Executive Board
A volatile year
The Government Pension Fund Global returned 2.7 percent in 2015 after a volatile year in financial markets. There were positive results for all of the fund’s asset classes.
2015 was a year of currency turmoil, negative interest rates, falling oil prices and weaker growth expectations for emerging markets. A strong first quarter was followed by two quarters with negative returns on equity investments before markets rallied again towards the end of the year, taking the return on equity investments to 3.8 percent for the year as a whole. Fixed-income investments returned 0.3 percent, and real estate investments 10.0 percent.
The fund’s market value grew by 1,044 billion kroner during the year to 7,475 billion kroner. The return for the year was 334 billion kroner, while the net inflow of new capital was 42 billion kroner – substantially less than the average over the past decade of 231 billion kroner a year. A weaker krone added 668 billion kroner to the value of the fund, but this has no bearing on the fund’s international purchasing power. Since its inception, inflow of 3,499 billion kroner has been transferred to the fund, and the cumulative return has been 2,676 billion kroner.
We opened real estate offices in Tokyo and Singapore, but have not yet made any investments in the Asian market. We continued to acquire properties in the US and Europe in 2015. Real estate investments increased to 3.1 percent of the fund, or 235 billion kroner. The real estate operation has been reorganized as a separate unit with its own leader group, and consists of more than 100 people.
In addition to this annual report, we will this year publish separate reports on responsible investment and real estate management, as well as an extended report on performance and risk. The aim of these reports is to increase transparency in every aspect of the fund’s management. Through five submissions to the Ministry of Finance, we have given advice on the development of the investment strategy. We have published Discussion Notes on key issues related to the investment strategy, accompanying this advice. We have also published revised Expectation Documents, which serve as a starting point for our dialogue with companies. The Asset Manager Perspective series presents our views on the financial markets.
The fund manages substantial assets, and the organization is growing. Norges Bank Investment Management is an international investment organization with 518 employees of 35 nationalities. Our task is to manage the Norwegian people’s financial wealth responsibly, efficiently and transparently.
Oslo, 9 March 2016
Chief Executive Officer of Norges Bank Investment Management
Good investment results
2015 saw considerable quarterly variations, but strong stock markets in the first and fourth quarters led to a return of 2.7 percent for the Government Pension Fund Global.
Equity investments returned 3.8 percent in 2015, fixed-income investments 0.3 percent and real estate investments 10.0 percent.
Return Of 334 Billion Kroner
The Norwegian government first transferred capital to the fund in May 1996. By the end of2015, the fund had received a total of 3,499 billion kroner and amassed a cumulative return of 2,676 billion kroner. Norges Bank Investment Management was set up on 1 January 1998 to manage the fund on behalf of the Ministry of Finance.
Between then and the end of 2015, the fund generated an annual return of 5.6 percent. After inflation and management costs, the annual return has been 3.7 percent.
Market Value More Than 7,400 Billion Kroner
The fund’s market value rose 1,044 billion kroner to 7,475 billion kroner in 2015. The market value is affected by investment returns, capital inflows and exchange rate movements. The fund returned 334 billion kroner in 2015 and received 42 billion kroner of net inflow from the government. The krone weakened against many of the currencies in which the fund invests, and in isolation this increased its market value by 668 billion kroner, but this has no bearing on the fund’s international purchasing power. The fund’s asset allocation was 61.2 percent equities, 35.7 percent fixed income and 3.1 percent real estate at the end of the year.
Returns on the fund’s equity and fixed-income investments are compared with returns on global benchmark indices for equities and bonds set by the Ministry of Finance on the basis of indices from FTSE Group and Barclays. We have also constructed internal reference portfolios for equities and bonds. These portfolios take into account the fund’s special characteristics and objective in order to achieve the best possible trade-off over time between expected risks and returns.
The overall return on the fund’s equity and fixed-income investments was 0.5 percentage point higher than the return on the benchmark indices in 2015. A high relative return on equity investments was offset to some extent by a negative relative return on fixed-income investments.
The fund has outperformed the benchmark index by 0.26 percentage point since 1998 and by 0.06 percentage point over the past decade.
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