Management of the Government Pension Fund Global
Introductory statement by CEO Yngve Slyngstad before the Standing Committee on Finance and Economic Affairs of the Storting.
Please note that the text below may differ from the actual presentation.
I would like to thank the Chair of the Committee for the invitation to speak on the management of the Government Pension Fund Global (GPFG).
Chart: 8 488 billion kroner in the fund
At the end of 2017 the market value of the GPFG was NOK 8 488 billion. The return on the GPFG came to 13.7 percent in 2017. It was a good year for global equity markets. In krone terms, the fund returned more than NOK 1 000 billion, which is the highest annual return in krone terms in the fund's history.
The annual return has averaged 6.1 percent since 1998. Net of inflation and costs, the rate of return has been 4.2 percent. The rate of return on the average krone in the fund has been 6.8 percent, or 4.9 percent net of inflation and costs.
Chart: Returns exceed inflows
Since its inception in 1996 to the end of 2017, a total of NOK 3 495 billion have been transferred to the GPFG, while the withdrawal has amounted to NOK 162 billion. The total return amounts to NOK 4 141 billion, which is larger than the total inflow to the fund.
The increase in the fund's market value stems to a great extent from an exceptionally high return over the past five years. Three out of every four kroner of the fund's return were earned in this period. The fund's market value has also risen in recent years as a result of the depreciation of the krone. This does not affect the fund's international purchasing power.
The fund is significantly larger than the estimated value of the petroleum reserves on the Norwegian continental shelf, and larger than what was expected when the first capital was invested 20 years ago.
Chart: 208 billion kroner in cash flow in 2017
In pace with the rise in the value of the fund, the cash flow from the fund's investments has also increased. This cash flow consists of share dividends, interest income and rental income. This current income amounted to nearly NOK 200 billion in 2017 alone. As global interest rates are very low, the largest contribution now comes from dividend payments from investee companies.
Chart: New real estate investments in 2017
The introduction of a new management model for the fund was an important change last year. This entails that the fund's unlisted real estate investments no longer form part of the benchmark index. The benchmark index now consists exclusively of equities and bonds. The fund may still invest in real estate, but it is up to Norges Bank to determine the scope and mix of real estate investments. In 2017, the fund made its first unlisted real estate investment in Asia, with the acquisition of five new buildings in Tokyo.
The adjusted management model ensures a holistic approach to an investment management assignment that includes both listed and unlisted investments, and can serve as a basis for further development of the investment strategy.
Chart: Management objective
The management objective is to achieve the highest possible return in the long term. The equity share of the fund is the most important decision when it comes to expected return and risk. The equity share has been discussed and adjusted approximately every ten years, and most recently in 2017. Last year the equity share of the benchmark index was set at 70 percent. At the end of 2017, the actual equity share of the fund was 66.6 percent.
Another important decision concerns the asset classes the fund may be invested in. This has been discussed regularly, and most recently in this year's White Paper.
The objective of the management model is high returns in the long term. At the same time, we have to manage the fund at an acceptable risk level, while maintaining an efficient organisation and investing responsibly. We must share information with the public and be open about all management activities.
We place considerable emphasis on this in our management of the fund. On risk, we have an annual publication providing analyses and assessments. An efficient organisation ensures low management costs, which are reported quarterly and annually in the financial accounts. Our responsible investment activities are also presented in an annual publication.
In our management of the fund we use different investment strategies that complement one another. The idea is that together, and over time, they generate excess returns compared with the benchmark indices. The various investment strategies have in total produced good results over time. One of the investment strategies is to employ external managers in areas where we believe local expertise is necessary when aiming for high returns, acceptable risk and responsible investment. This is particularly relevant for emerging markets and small and mid-sized companies.
Costs related to external management have over time amounted to about 40 percent of total management costs for the fund. At the same time, positive excess returns from external management have made considerable contributions to the fund's total excess return.
Chart: Stable internal management costs
We place emphasis on upholding high standards of quality in the fund's management and ensuring control and cost effectiveness. Total management costs as a share of assets under management have been low and stable in recent years, despite the build-up of a portfolio of unlisted real estate investments and an increase in the equity share of the fund. At the same time the management has been expanded by a number of new markets.
We have realised significant economies of scale in recent years. Our aim is to keep internal management costs below 0.05 percent of assets under management. External management costs come in addition to this. In 2017 total management costs came to 0.06 percent of assets under management. This is very low compared with other funds.
Chart: Responsible investment
Good corporate governance and well-functioning boards are important for the fund's return in the long term. Expressing clear expectations towards the companies in our investment portfolio, based on internationally recognised principles, is part of our work in this area. Our expectations are aimed primarily at company boards and are a starting point for dialogue. We have previously issued expectations documents on children's rights, water management, climate change and human rights.
In 2017, we issued a new expectations document on tax and transparency. We sent this document to the 500 largest companies in our portfolio. In the first quarter of 2018 we also published a new expectations document on anti-corruption.
Later this year we will update the water management expectations document. So far this has covered fresh water, but oceans will also be included going forward.
Another issue we raised in 2017 was CEO remuneration, which we covered in a position paper made public last year. In this position paper we advocate that remuneration should be driven by long-term value creation and that the interests of the CEOs should be aligned with those of shareholders.
Chart: Public information available on our website
All public information about the fund is available on our website. In addition to our annual report, we publish extensive information on responsible investment, the unlisted real estate investments, and the return and risk of the fund. Our website also includes several publications, data and background information. Together, these documents provide a high level of transparency on the management of the fund.
We manage the financial wealth of future generations in a controlled, efficient, responsible and transparent manner. But we will never lose sight of the fact that the objective is a high return.