1 - Key figures 2006

Government Pension Fund – Global

The Government Pension Fund – Global is a continuation of the Government Petroleum Fund, which was established in 1990.

The purpose of the Government Pension Fund – Global is to secure the government savings necessary to meet the rapid rise in public pension expenditures in the coming years, and to support a long-term management of petroleum revenues. The Ministry of Finance has delegated the operational management of the Fund to Norges Bank. Norges Bank Investment Management (NBIM), which is an area of operation at Norges Bank, is responsible for the operational management.

Key figures 2006

In 2006, the return on the Government Pension Fund – Global was 7.9 per cent measured in international currency.¹⁾ The return on the equity portfolio was 17.0 per cent and the return on the fixed income portfolio was 1.9 per cent. Measured in NOK, the return on the Fund was 5.9 per cent in 2006. The difference between the return measured in international currency and the return measured in NOK is due to movements in the krone exchange rate, which have no effect on the long-term international purchasing power of the Fund.

Norges Bank achieved an excess return of 0.15 percentage point compared with the benchmark portfolio defined by the Ministry of Finance. The excess return is largely attributable to internal equity and fixed income management. External equity management made a negative contribution to the results in 2006. This was the ninth consecutive year with an excess return.

The market value of the Fund at the end of 2006 was NOK 1 784 billion, an increase of NOK 384 billion since the beginning of the year. The Ministry of Finance transferred NOK 288 billion in new capital and the return measured in the international currency basket increased the market value by NOK 124 billion. The Norwegian krone appreciated against the international currency basket, reducing the NOK value of the Fund by 28 billion.

Table 1-1: Nominal and real annual return measured in terms of the Fund's currency basket. 1997 -2006. Per cent

Return 1997 - 2006

Table 1 shows the return on the Government Pension Fund – Global. Since 1997, the average nominal annual return has been 6.49 per cent, measured in international currency. The return has been positive in eight of these years and negative in two. In 1997, the Fund was invested only in government securities. Since 1998, the portfolio has consisted of both equities and fixed income instruments. The average nominal annual returns on the equity and fixed income portfolios for the years 1998 - 2006 have been 5.37 and 7.02 per cent respectively.

Since 1997, the real return on the Fund, i.e. the nominal return adjusted for inflation, has been 4.67 per cent. Average management costs have amounted to 0.09 per cent of assets under management. Since 1997, the net real annual return less management costs has been 4.58 per cent.

Chart 1-1 shows developments in the average net real annual return on the actual portfolio and on the benchmark portfolio. The difference between the two curves expresses the excess return attributable to Norges Bank's management.

Chart 1-1: Average net real annual return since 1997

Chart 1-2: Annual return on the equity and fixed income portfolios, measured in terms of the Fund's currency basket. 1998 - 2006. Per cent

Chart 1-3: Cumulative return on the Pension Fund 1998-2006. In billions of NOK

Chart 1-2 illustrates the annual percentage return on the equity and fixed income portfolios since 1998, measured in terms of the Fund's international currency basket. A positive return on the equity portfolio was recorded for six of these nine years, and a positive return on the fixed income portfolio for all years except 1999.

The Fund's cumulative return in the period 1 January 1998 to end-2006 amounted to NOK 336 billion. This is shown by the shaded area in Chart 1-3. NOK 222 billion or 66 per cent of the cumulative return came from equity investments, which have accounted for approximately 40 per cent of the portfolio. The red line in the chart shows the cumulative return on the equity portfolio. Between August 2001 and November 2004, the cumulative return on the equity portfolio was negative. The past four years' strong advances in equity markets have contributed to this return. The market value of the equity portfolio at the end of 2006 was 32 per cent higher than the average purchase price.

The blue line in the chart shows that there has been a far more stable development in the return on the fixed income portfolio. The cumulative return on the fixed income portfolio was NOK 114 billion at the end of 2006.

Chart 1-4: Pension Fund. Index for cumulative actual return and benchmark return (left-hand scale) and quarterly excess return in percentage points (right-hand scale). 1998-2006

Chart 1-4 shows the excess return for each quarter since the beginning of 1998. Norges Bank has achieved an excess return in 26 of the 36 quarters since the Fund first invested in equities. Since 1998, the cumulative return on the benchmark portfolio has been 65.1 per cent, whereas the actual return has been 72.0 per cent (see Chart 1-4). The cumulative gross excess return has been 6.9 percentage points, which corresponds to NOK 28.9 billion. The average annual excess return since 1998 has been 0.48 per cent.

Norges Bank's foreign exchange reserves

The foreign exchange reserves shall be available for interventions in the foreign exchange market in connection with the implementation of monetary policy or to promote financial stability. The reserves are divided into a money market portfolio and an investment portfolio. In addition, a buffer portfolio is used for the regular foreign exchange purchases for the Government Pension Fund – Global. In Norges Bank the investment portfolio and the buffer portfolio are managed by Norges Bank Investment Management (NBIM), while the money market portfolio of approximately NOK 6.5 billion is managed by Norges Bank Monetary Policy.

Key figures 2006

In 2006, the return on the investment portfolio was 7.3 per cent measured in international currency. The return on the equity portfolio was 17.0 per cent and the return on the fixed income portfolio was 1.8 per cent. Measured in NOK, the return on the total portfolio was 5.2 per cent. The difference between the return measured in international currency and the return measured in NOK is due to movements in the krone exchange rate, which have no effect on the long-term international purchasing power of the portfolio.

NBIM achieved an excess return of 0.13 percentage point compared with the benchmark portfolio defined by Norges Bank's Executive Board. The excess return is largely attributable to the internal fixed income management. Equity management made a negative contribution in 2006.

The market value of the portfolio at the end of 2006 was NOK 225 billion, an increase of NOK 13 billion since the beginning of the year. New capital of NOK 2 billion was transferred to the portfolio and the return on the investments increased the market value by NOK 15.5 billion, while a stronger krone reduced the portfolio's market value by NOK 4.5 billion.

Table 1-2: Nominal and real annual return measured in terms of the investment portfolio's currency basket. 1998 -2006. Per cent

Return in the period 1998 - 2006

Table 1-2 shows the percentage return on the investment portfolio since 1998. Until the end of 2000, the entire portfolio was invested in fixed income securities. Since 2001, the portfolio has included equities and in 2006, the equity portion was increased from 30 to 40 per cent. Since 2002, the portfolio has also included non-government-guaranteed bonds. Since 1998, the average nominal annual return on the portfolio has been 5.95 per cent measured in international currency. In the six years of equity investment, the average annual return on the equity portfolio has been 2.98 per cent. During the same period, the average annual return on the fixed income portfolio has been 5.31 per cent.

The gross real annual return since 1998 has been 4.10 per cent. Average management costs have amounted to 0.06 per cent of assets under management. The net real annual return since 1998 has been 4.04 per cent.

The Fund's cumulative return in the period 1 January 1998 to end-2006 amounted to NOK 73 billion. This is shown by the shaded area in Chart 1-5. NOK 23 billion or 32 per cent of the cumulative return came from equity investments. The red line in the chart shows the cumulative return on the equity portfolio. From January 2001 to April 2005, there was a cumulative negative return on equity investments.

Chart 1-5: Cumulative return on the investment portfolio 1998-2006. In billions of NOK

The blue line in the chart shows that there has been a far more stable development in the return on the fixed income portfolio. The cumulative return on the fixed income portfolio came to NOK 50 billion at the end of 2006, which was the equivalent of 68 per cent of the cumulative return in the period.

Chart 1-6: Investment portfolio. Index for cumulative actual return and benchmark return (31.12..1997=100, left-hand scale) and quarterly gross excess return in percentage points (right-hand scale). 1998-2006

Since 1998, the investment portfolio's gross excess return has been positive in 27 of 36 quarters (see Chart 1-6). Since 1998, the cumulative return on the benchmark portfolio has been 65.5 per cent, whereas the actual return has been 68.3 per cent. The cumulative gross excess return measured in terms of the currency basket has been 2.8 percentage points, which corresponds to NOK 2.1 billion.

The buffer portfolio

The buffer portfolio is part of Norges Bank's foreign exchange reserves. The purpose of the portfolio is to ensure an appropriate supply of new capital to the Government Pension Fund – Global. The portfolio is built up continuously by means of foreign exchange transfers to Norges Bank from the State's Direct Financial Interest in petroleum activities (SDFI) and by Norges Bank's foreign exchange purchases in the market to meet the foreign exchange requirements of the Government Pension Fund – Global. A benchmark portfolio has not been defined for the buffer portfolio. With the exception of December, capital is normally transferred to the Fund each month. In 2006, the return on the buffer portfolio was 1.9 per cent measured in NOK. The market value of the portfolio was NOK 23 688 billion at year-end.

Government Petroleum Insurance Fund

The Government Petroleum Insurance Fund's purpose is to provide a reserve to cover damages and liabilities which affect the State's Direct Financial Interest in petroleum activities (SDFI). Pursuant to the Act relating to the Government Petroleum Insurance Fund, Norges Bank is responsible for the operational management of the fund. The management mandate is stipulated in a regulation and written guidelines issued by the Ministry of Petroleum and Energy. A management agreement, which further regulates the relationship between the Ministry of Petroleum and Energy as delegating authority and Norges Bank as operational manager, has also been drawn up. The guidelines and management agreement are available on Norges Bank's website.

Key figures 2006

In 2006, the return on the Government Petroleum Insurance Fund was 2.2 per cent measured in international currency. Measured in NOK, the return on the portfolio was 1.3 per cent. The difference between the return measured in international currency and the return measured in NOK is due to movements in the krone exchange rate, which have no effect on the long-term international purchasing power of the portfolio.

Norges Bank achieved an excess return of 0.03 percentage point compared with the benchmark portfolio defined by the Ministry of Petroleum and Energy. The Fund's assets are only invested in fixed income instruments and the entire Fund is managed internally by an indexing strategy.

The market value of the Fund at end-2006 was NOK 15.2 billion, an increase of NOK 1 billion since the beginning of the year. Insurance premiums from the Government amounted to NOK 1.2 billion and claims payments amounted to NOK 462 million.

Total excess return of NOK 2.8 billion in 2006

NBIM's management is measured against a benchmark portfolio defined by the Ministry of Finance. One important goal of asset management is to generate a somewhat higher return over time on the actual portfolios than on the benchmark portfolios. In 2006, the Government Pension Fund – Global, the investment portfolio and the Government Petroleum Insurance Fund generated excess return. The aggregate excess return amounted to NOK 2.8 billion.¹⁾

Chart 1-7: Cumulative gross excess return from 1 January 1998 to 31 December 2006. In billions of NOK

Chart 1-7 shows the cumulative excess return since the establishment of NBIM in January 1998. The combined contribution in the period is NOK 31.1 billion. This breaks down into NOK 28.9 billion on the Government Pension Fund – Global, NOK 2.1 billion on the investment portfolio, and NOK 0.1 billion on the Government Petroleum Insurance Fund.

Table 1-3: Return measured in NOK and risk as at 31.12.2006. Annualised