NORWAY – The domestic part of Norway's Government Pension Fund – the Government Pension Fund Norway (GPFN) – produced returns of 12.2% in 2012 before management costs, lower than the 13.4% reaped by the much larger Government Pension Fund Global (GPFG).

Management costs for the GPFN were 0.09% of assets compared to 0.06% of assets for the GPFN, according to the Ministry of Finance's annual report on the overall fund to the Storting,  Norway's parliament.

The overall value of the Government Pension Fund was NOK3.96tln (€528bn) at the end of 2012, up NOK520bn on the year. The GPFG accounted for NOK3.81tln of these assets.

According to the report, the overall fund's performance reflected favourable developments in global equity and bond markets in 2012. But it warned there was considerable economic uncertainty lying ahead.

"Going forward, one needs to be prepared for significant fluctuations in the value of the fund," the report said.

The ministry noted that annual returns for the two funds had varied widely over the previous 13 years, with the GPFG having produced returns of between -23% and 26%, and GPFN's returns fluctuating from -25% to 34%.

The report analysed whether the GPFG should use strategies exploiting systematic risk factors, such as value, momentum and size, and if so, the extent to which it should do so.

The government was against including these in the benchmark, however.
Sigbjørn Johnsen, the country's finance minister said: "Our assessment is that the benchmark index of the GPFG should not be adjusted for systematic risk factors."

"Any strategies for exploiting such factors should instead form part of the operational management of Norges Bank," he added.

The ministry of finance said it had commissioned a report from MSCI on the implications of tilting large equity portfolios towards systematic risk factors.

That report showed that the size of an equity portfolio restricted the extent to which its composition could be tilted away from market-value weights and toward systematic risk factors, it said.

"When the composition of the portfolio is changed, both the ownership stakes in individual companies and the volume of rebalancing trades can become large," it noted.

MSCI had shown that many weighting principles, which were popular among smaller investors, could not be practised for equity portfolios as large as the GPFG's, the ministry said.

The GPFG was formerly called the Government Petroleum Fund, the GPFN used to be called the National Insurance Scheme Fund.

The funds are managed by Norges Bank and Folketrygdfondet respectively, under mandates set by the ministry of finance.