NORWAY - Negative investment returns and a strong domestic currency reduced the market value of the Government Pension Fund - Global by NOK72.8bn (€9.2bn) to NOK 1.946trn during the first quarter of 2008.

The first quarter results published by Norges Bank Investment Management (NBIM) showed the overall negative return for the pension fund was -7.83%, as "financial turmoil" during the period saw equity markets fell sharply, although it claimed fixed income markets had generated a positive return.

As a result, NBIM revealed the Government Pension Fund - Global achieved an equity negative return of -12.67% in the first three months of 2008, while the fixed income portfolio returned 0.87%. However, international currency reported a return of -5.62% which was 0.81% below the benchmark portfolio defined by the Norwegian Ministry of Finance.

The fund also received new capital transfers of NOK 88bn from the Ministry of Finance during the quarter, although the negative investment returns reduced the value of the fund by NOK 114.8bn, while a stronger kroner - in relation to the currencies in which the fund is invested - resulted in a loss of NOK 46.1bn.

NBIM said the results for the first quarter of 2008 show a negative excess return from both equity and fixed income management, although it claimed the results for fixed income management were "considerably weaker than those for equity management".
It said the "poor results" for fixed income management had been dominated by the performance of external management, which is exposed to various types of securitised debt instruments including some backed by US mortgages.

At the end of the first quarter, just under 15% of the overall fund was managed by external managers - equating to 57% of the overall active management risk in the fund - however these mandates accounted for 50% of the total management costs, as the unit cost of internal management was 0.16% compared to 0.31% for external mandated.
Despite this, NBIM confirmed the fund had allocated four new equity mandates during the quarter, with Rheos Capital Works awarded a regional mandate, while Ecofin Ltd, Levin Capital Strategies and Wellington were awarded sector mandates.
That said, NBIM also highlighted "substantial losses" in the part of internal fixed income management based on "exploiting differences in the relative pricing of securities with similar risk characteristics", following the "rapid widening" of the credit spread between high-quality bonds with credit risk and government bonds.

Although NBIM admitted the fixed income risk model used by the organisation - expressed as an estimate of the tracking error - had "underestimated the actual risk in the portfolio".

It said the current risk model estimates the size of the variations in return that can be expected in normal periods, based on historical data, however since the middle of 2007, fixed income markets "have been affected by factors that have caused volatility and correlations to depart from historical levels".

NBIM admitted it "will take some time to adjust the model, and it may therefore be imprecise during periods with major changes" but claimed the model's weaknesses "are supplemented" with additional analyses.

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