Petroleum Fund beats benchmark by 0.59 points

NORWAY – The Petroleum Fund made its highest ever return in 2003, 12.6%, beating its benchmark by 0.59 basis points.

Its total portfolio now stands at 845.3 billion crowns (97.9 billion euros), up from 609 billion crowns at the end of 2002.

“The return on the Government Petroleum Fund was 12.6% (measured in international currency) in 2003,” said central bank governor Svein Gjedrem and Norges Bank Investment Management executive director Knut Kjaer in the fund’s 2003 annual report.

“This is the Fund’s highest ever return. The solid result is due to high returns on equity investments amounting to 22.7%. The return on the fixed income portfolio was 5.3%.” The Environmental Fund returned 22.9%.

“The return on the Petroleum Fund was 0.59 percentage point higher than the return on the benchmark portfolio in 2003,” they added. “This is the sixth consecutive year with an excess return. The total gross excess return in this period has been 9.4 billion krone.”

The fund said it made “substantial changes” in the benchmark portfolio in 2003, as it did in 2002, as non-government guaranteed securities have replaced a large portion of the government securities in Europe and the US.

During the year the fund received 103.9 billion crowns in transfers from the government, an estimated 64% of the government’s petroleum revenue.

“The share of external management has increased somewhat in volume from 2002 to 2003, whereas the risk-taking in external and internal management remains unchanged.” External managers accounted for more than half the active risk-taking.

“Norges Bank’s strategy is to allow external managers with specialised expertise to take responsibility for a large portion of the overall active risk-taking, with the bank, through internal management, tries to take advantage of the economies of scale inherent in the funds size as well as to engage in active management in some areas.”

At the end of 2003, 24 external managers had a total of 46 mandates. Around 28% of the fund is managed externally.

Nine managers ran 12 fixed income mandates worth a total of 43 billion crowns: Bridgewater, Morgan Stanley, Pareto, Hyperion, Lincoln, Merrill Lynch, Putnam, State Street and TCW.

Fifteen managers ran 34 active equities mandates worth a total of 148 billion crowns.

Regional mandates: Alpha, BlackRock, Capital International, Fidelity, Gartmore, J P Morgan, Merrill Lynch, Schroder and Sparx.

Sector mandates: Alliance Capital, Credit Suisse First Boston, Deutsche Asset Management, Franklin Advisors, Schroder, Wellington, WH Reaves.

Norges Bank Investment Management voted at 39 annual meetings in 2003, voting for 37% of proposals and against four percent. It has decided to focus on the largest 150 companies in the portfolio, which comprise more than 50% of the portfolio’s value.

The fund has also come up with a possible alternative wording for the regulation governing its ownership rights.

The proposed new wording: “Norges Bank shall exercise ownership rights when this is considered necessary to safeguard financial interests.”

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