NORWAY - The Norway Government Pension Fund Global, which returned 3.9% in the first quarter, has played down concerns about its exposure to bonds "from several heavily-indebted" European governments.

The fund said its positive performance in the first three months of 2010 was boosted by increased liquidity in the fixed income markets.

Figures from the quarterly report showed at the end of March the value of the Global pension fund increased by NOK123bn to NOK2.763trn (€347.8bn) as equity investments accounting for 62.6% of total assets returned 4.9%.

Yngve Slyngstad, chief executive officer of Norges Bank Investment Management (NBIM), said: "The fund's equity investments tracked global stock markets higher in February and March after a weak start to the year. Stock markets in the US and Asia performed better than in Europe, which was held back by concern over high government debt in several countries."

The report noted concerns about government debt in countries such as Greece, Portugal, Italy and Spain, as it admitted the pension fund "had 12.6% of its European stock investments in these countries at the start of the quarter".

However, these concerns did not appear to significantly impact the return of 2.1% on the fixed income portfolio that accounts for 37.4% of the assets.

NBIM acknowledged the price of credit default insurance for Greek government debt had risen to record levels in January and continued to climb through the quarter, and it admitted the fund "held government bonds from several heavily-indebted European countries at the start of the year".

But NBIM stated: "These investments were notably smaller than their corresponding weights in the benchmark portfolio the fund follows." It also emphasised the impact of improved liquidity in the fixed income market, which led to lower risk premiums and higher prices for bank bonds, corporate bonds and securitised debt.

Slyngstad said: "About half of the fixed-income portfolio's excess return came from investments made before 2007 that became illiquid during the financial crisis. These benefited from an improvement in liquidity and prices of bonds, a development that started in the second half of 2009 and continued in the first quarter."

The pension fund is now also legally entitled to invest in real estate after the government approved a mandate to invest up to 5% of the fund in the asset class earlier this year, to be financed from a reduction in fixed income investments. (See earlier IPE article: Norway-Global given top-line real estate guidelines)

But it appears unlikely to make the first investments before 1 September 2010 when Karsten Kallevig will join NBIM to head up the real estate team from his previous role at Grove International Partners' Japanese office.

In the first quarter NBIM has also revised its voting guidelines to emphasis the need for independent chairmen of company boards. It also confirmed its view that the company board should remain responsible for senior management remuneration. This is in contrast to growing calls for shareholders to have more of a 'say on pay'.

NBIM stated: "The remuneration systems at the companies we invest in are varied, complex and constantly evolving. The board's in-depth knowledge of a company and its management makes it more qualified than shareholders to set pay terms. NBIM therefore votes against proposals to introduce shareholder votes on executive pay."

Instead it argued the best way to control remuneration is to elect board members "who are capable of representing our interests and to hold them accountable for unacceptable practices".

Meanwhile, NBIM announced plans to expand its operations in Asia with the opening of a Singapore office in June. The new office will focus on investment and trading activity in the region complementing the work of the existing Shanghai office.

At the end of 2009, almost 10% of the Government Pension Fund Global's assets were invested in Asian countries, including Singapore, China, Japan, South Korea, Malaysia and Thailand.

"Asia is of increasing importance to NBIM. The move into China two years ago helped us form new business contacts and find new investment opportunities in an important market. The next step into Singapore will further strengthen our operations in this region," said Slyngstad.

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