Norges Bank Investment Management (NBIM) has told the Norwegian government its active management of the NOK21trn (€1.8trn) sovereign wealth has been more profitable in the last five years than before, and revealed a strategy change set to increase its equity risk levels.
In a letter to the Finance Ministry, NBIM wrote that between 1998 and 2024, the Government Pension Fund Global’s (GPFG) actual return after costs had been 24 basis points higher than a return from a passive strategy, after costs.
“Over the past five years, the difference is somewhat larger, at 28 basis points,” it said.
Norges Bank governor Ida Wolden Bache and NBIM deputy chief executive officer Trond Grande wrote in the letter published yesterday: “Norges Bank is satisfied that the returns for the fund overall have been good over time, and that the returns are higher than the benchmark index against which the management is measured.”
“In our assessment, the management has been carried out in a sound manner,” they wrote.
NBIM was responding to a request from the ministry on 6 June this year for analysis and assessments from the bank as part of a major periodic review of the SWF’s management.
Within the review, NBIM’s active management is coming under particular scrutiny, with the government having commissioned an expert group to analyse and assess this.
Improving the fund’s returns through the scope that exists for active management at the primarily index-tracking SWF has been a priority for Nicolai Tangen since he started as CEO of NBIM five years ago.
Equity investments continue to be largest allocation
In yesterday’s letter, NBIM told the ministry the active management success had largely come from equities since 2020 – by far the fund’s largest asset class with a 70% allocation – while being eroded by real estate.
Over the past five years, equity management had contributed 0.31 of a percentage point to the excess return, but real estate management had made a negative contribution of -0.13 percentage points, NBIM said.
Unsatisfied with the results in real estate management, NBIM revealed strategy changes to address this, ahead of the publication of its 2026-2028 strategy plan, saying it would improve the balance of its real estate exposure across a broader range of property sectors in future, and also look into including a larger element of indirect investments in the asset class.
Wolden Bache and Grande also told the ministry NBIM would change the way it financed its unlisted real estate investments, considering in a more granular way the precise combination of equities and fixed income assets to sell for each property investment – rather than using the same proportion of equities for each one.
“Given the new framework for financing real estate investments, we expect that the financing going forward will overall have a somewhat lower equity share than today,” the pair said.
“The total market risk in the fund may thus increase marginally compared with today’s level, and the real estate strategy may entail a marginal exposure to general market risk,” they said.
Increasing risk
NBIM also argued that its leeway for deviation from the benchmark index may have to be increased in future, although the current 1.25 percentage point tracking error allowed was enough for now.
Risk in financial markets may increase in future, it said, adding that a larger limit for deviations would give NBIM more room for manoeuvre to make adjustments when relative volatility rose due to market turmoil.
It also said the limit for expected relative volatility should be large enough for NBIM to “exploit the fund’s characteristics” in periods of high market volatility too.
“Overall, we assess that the limit for expected relative volatility is sufficient today, given the current management model,” Wolden Bache and Grande said, adding: “At the same time, the conditions discussed above may mean that it may be appropriate to reassess this in the future.”
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