The first 10 years

In May 1996, the Ministry of Finance made the first transfer to what was then called the Government Petroleum Fund. Starting with a capital of close to NOK 2 billion, the Fund has now increased to NOK 1 784 billion. At the beginning of 2006, the Fund was renamed the Government Pension Fund – Global, albeit with the same overriding function and investment strategy.

Ten years is a short period to assess the long-term strategy for the management of the Government Pension Fund – Global. The average nominal annual return for the years 1997 to 2006 was 6.5 per cent and the real return after management costs was close to 4.6 per cent. Since 1998, around 40 per cent of the portfolio has consisted of international equities, while 60 per cent has been invested in fixed income instruments. Even though the decline in global equity markets from 2000 into 2003 was the sharpest since the interwar years, equities have accounted for the largest contribution to the return. In 2006, Norges Bank recommended that the Ministry of Finance should increase the allocation to equities in the strategic benchmark portfolio.

When the Government Pension Fund – Global starting investing in equities in 1998, Norges Bank established a new operational area called Norges Bank Investment Management (NBIM). In addition to the operational management of the Fund for the Ministry of Finance, NBIM also manages the bulk of the Bank's foreign exchange reserves, and the Government Petroleum Insurance Fund for the Ministry of Petroleum and Energy. In this Annual Report, we present the results of all the funds under NBIM management for the first time. At the end of 2006, total assets under management amounted to NOK 2 047 billion.

In 2006, asset management generated solid returns on the Government Pension Fund – Global and the Bank's foreign exchange reserves, reflecting strong gains in international stock markets. International equity prices rose by double-digit figures for the fourth consecutive year, and around 17 per cent over the past year. Bond markets exhibited sluggish developments with market returns close to 2 per cent.

The Ministry of Finance has defined a benchmark portfolio for the Government Pension Fund – Global, against which Norges Bank's asset management is measured. The benchmark portfolio consists of a large number of international equities and bonds. In constructing the benchmark portfolio, the Ministry of Finance also determines the bulk of the expected return and risk in management.

NBIM has increased the average annual return on the Pension Fund by 0.48 percentage point in excess of the benchmark return. This is equivalent to a total of NOK 28.9 billion. Active management has not increased the Fund's absolute market risk. The Fund has outperformed the benchmark in each of the nine years. In 2006, the excess return was 0.15 basis points.

After the Ministry of Finance defined new ethical guidelines for the management of the Pension Fund in 2004, Norges Bank has intensified the work on promoting corporate governance in the companies and markets in which the Fund invests. A separate Section and two feature articles provide further details about the activities in 2006 and plans and priorities for future work.

Investment management has become a key component of Norges Bank's activities. In 2006, the Executive Board revised the strategy for the further development of NBIM. The ambition is to be among the world's leading asset managers. The objective is to generate considerable values through active management of the portfolios. The transfer of new capital and day-to-day management shall be cost-effective and sound. By exercising ownership rights, NBIM protects financial assets and seeks to promote a high level of corporate ethical standards. NBIM will continue to devote substantial resources to developing the organisation, its capabilities and efficient information systems.

Confidence is of particular importance in the management of such substantial values for future generations. Norges Bank places considerable emphasis on a high degree of integrity and adequate cost control in its management. As in all earlier years, there were no significant breaches of the guidelines that have been established for the management of the portfolio in 2006.

Transparent and comprehensive information is one of the preconditions for a high degree of confidence. By means of this Annual Report, submitted by Norges Bank's Executive Board, we wish to present material that provides a good basis for assessing Norges Bank's work in the field of international investment management.

Svein Gjedrem Central Bank Governor	Knut N. Kjær Executive Director, Norges Bank Investment Management