NORWAY – The Norwegian Pension Fund Global faces "considerable challenges" in maintaining its high investment returns in the current market environment, the chief executive of Norges Bank Investment Management (NBIM) has warned.

Yngve Slyngstad also told the parliamentary standing committee on finance and economic affairs that the NOK4.1trn (€558bn) fund was always at risk of large losses over a longer period, noting that it could have incurred a 30% loss had its current investment strategy been in place during the worst year of performance witnessed in the last century.

The chief executive also stressed that a new asset allocation, one that will see the Government Pension Fund Global's (GPFG) exposure to emerging markets grow at the cost of a lower European weighting, would not see investments pulled from the Continental market.

"Although the proportion of investments in Europe is reduced, actual overall investments in this region will not decline," he said.

"We are using inflows of new capital to the GPFG to invest in other regions. The proportion of European equity holdings will continue to be higher than for other regions for many years ahead."

According to Slyngstad, the fund's emerging market focus last year saw it largely target fixed income – with around two-thirds of its NOK200bn investment in the region last year in bonds.

The shift comes as part of a strategy to diversify currency holdings away from the four global currencies of US dollar, yen, euro and sterling, but could also lead to larger short-term fluctuations, he said.

However, he warned the committee not to expect record-breaking returns each and every year.

His comments come shortly after NBIM announced annual returns above 13%, the fund's second best return ever.

"Even though returns on the GPFG have been high in recent years," he said, "we must be prepared for the possibility of periods of large value losses.

"With the current value of the GPFG and its asset composition, annual performance on a par with the worst year recorded in the past 100 years would have resulted in a loss of just below 30%, or a good NOK 1.2trn."

He added that the fund faced "considerable" challenges in future.

"The safest investment alternative will provide a return after inflation below zero," he said. "Many countries are heavily indebted and monetary policy implies low – and, in some cases, negative – real interest rates ahead.

"Moreover, today's favourable stock market conditions may be based on expectations that do not materialise."

Slyngstad also emphasised the importance of engagement with the fund's investee companies, but said its results would need to be assessed over time.

However, he stressed that active ownership efforts – which recently saw Slyngstad join the nominating committee of car maker Volvo – would be concentrated on around 550 of the 7,400 companies in which the fund was among the 10 largest shareholders.