Norway's Petroleum Fund outlines bond, mandate policy

NORWAY – Norway’s Petroleum Fund says it is to continue to sell government bonds to buy non-government bonds – and it has signalled that it may award more external mandates.

“Substantial shifts were made in the fixed income portfolio in 2002 as a result of the Ministry of Finance’s decision to change the investment strategy,” said Norwegian Central Bank governor Svein Gjedrem and Norges Bank Executive Investment Management executive director Knut Kjær in the fund’s annual report that was released today.

“Government bonds worth more than 130 billion crowns (16.8 billion euros) were sold in order to purchase non-government-guaranteed bonds, including corporate bonds,” they said. “The shift will continue in 2003.”

The fund also signaled that it would hire more external managers.

“To simply maintain the degree of (relative) risk-taking, the number of external mandates must continue to increase at least in pace,” it added. At the end of 2002 there were 23 different external managers with a total of 40 mandates.

On average, about 80% of its assets were managed internally by Norges Bank in 2002, which runs the fund for the government. Although external managers manage 20% of the assets they “account for more than half of the active risk-taking”.

Overall, the fund’s returns fell 4.7% overall in 2002, taking the fund’s value to 609.0 billion crowns (78.7 billion euros), when measured in international currency.

The return on the fund was positive in the fourth quarter of 2002, showing a 2.8% rise in the period.

Stocks were the worst hit part of the fund’s portfolio. “The return on the equity portfolio in 2002 was negative, at -24.4%,” it said. “The return on the fund’s fixed income portfolio was 9.9%.”

It said that for the 1997-2002 period, management costs averaged 2.5% a year.

Norway’s Ministry of Finance transferred 125 million crowns (16.15 billion euros) into the fund during the year.

It’s equity portfolio stood at 229.8 billion crowns at the end of the year, while its fixed income portfolio was worth 378.0 billion crowns. The Environmental Fund was worth 1.2 billion crowns.

“The fund’s long-term strategy, which is stipulated by the Ministry of Finance, largely determines the distribution of equities (around 40%) and fixed income instruments (around 60%),” the fund said.

That strategy is “essentially in accordance with advice from
Norges Bank”.

“Because the horizon for investments is very long the Petroleum Fund can cope with wide fluctuations in returns better than most other large investors in the global capital market. “

The fund said it had an average information ratio of 0.94 in the 1998-2002 period. “This means that the results up to now must be regarded as good in relation to the risk taken.” The information ratio measures a manager’s performance against a benchmark.

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