NORWAY - The Norwegian Government Pension Fund - Global reported a return on investments of -1.9% in the second quarter of 2008, reducing the value of the fund by NOK39bn (€4.9bn).

Figures from the pension fund's quarterly report showed the overall value of the fund increased by NOK46bn over the three months to the end of June 2008 to NOK1.992trn (€252bn).

That said, this increase was delivered through NOK91bn of net capital inflows transferred into the fund, as a negative investment return of -1.87% overall - including a 1.6% reduction on equities and 1.72% fall on fixed income - reduced the fund by NOK39bn, while a stronger Norwegian Krone in relation to the currencies the pension fund is invested in led to a further NOK6bn loss.

In addition, the report revealed that in the past 12 months to 30 June 2008, the Government Pension Fund - Global reported a NOK51bn increase in value, but had actually received NOK331bn in new capital.

Norges Bank, which manages the pension fund through its subsidiary Norges Bank Investment Management (NBIM), said the "considerable volatility" in both equity markets and parts of the fixed income market had resulted in a loss of NOK147bn through negative investment returns and NOK133bn because of a stronger Krone.

Yngve Slyngstad, executive director of NBIM, said: "The second quarter featured considerable volatility in both equity markets and parts of fixed income markets. The crisis in the financial system continued, with international financial institutions reporting heavy losses. Lower growth and accelerating inflation led to lower corporate earnings expectations."

Figures from the pension fund's profit and loss account showed equity and unit trust investments produced a negative return of -NOK14.7bn in the second quarter, while bonds and other fixed income instruments reported a slightly larger loss of NOK20.2bn.

Although NOK1.2bn of the losses attributed to bonds and fixed income were the result of "unrealised losses" from exposure to Securitised Investment Vehicles (SIV), NOK4bn was attributed to losses from the fund's net exposure to asset-backed securities (ABS), residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).

Figures showed since 1997 the fund generated an annualised annual gross negative return of -6.93% over the last 12 months, although even in the second quarter investments outperformed the benchmark index return of -2.1% by 0.24%, following "positive contributions" from external management and equity management.

The report also revealed the market value of the fixed income portfolio fell from NOK1.011trn at the end of March 2008 to NOK961bn in the second quarter, although the equity portfolio increased from NOK935bn to NOK1.031trn in the same period as the fund continued its gradual increase in equity investment.

The pension fund announced plans to increase its equity allocation from 40% to 60% in the summer of 2007 but the change is being implemented over a period of time because it is such a large fund so as of the end of June 2008 the fund had increased its equity allocation to 52% - the first time the size of the equity portfolio has surpassed fixed income.

But while it is allocating more money to equities - in the second quarter the average ownership interest in European companies exceeded more than 1% - the amount of assets run by external managers has decreased.

The report confirmed "the level of external management has been reduced in both absolute and relative terms" so at the end of the second quarter only 11% of the fund's total assets was managed externally - this makes it the "lowest level since equities were first included as an asset class in the fund in 1998".

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