Pirkko Juntunen reports on Folketrygdfondet, which manages the Government Pension Fund Norway and the Government Bond Fund within tight regional constraints

Folketrygdfondet, which manages the Government Pension Fund - Norway and the Government Bond Fund with combined assets of NOK163bn (€20.2bn) on behalf of the country's ministry of finance, is the quiet sibling of the Government Pension Fund Global, which because of its size and international profile often hogs the limelight.

As at 30 June 2010 the domestically focused fund had NOK113bn (€14bn) in assets under management which are mainly invested in Norwegian equities and bonds. However, capital can also be invested in shares listed in Norway, Denmark, Finland and Sweden, and in fixed income instruments where the issuer is domiciled in these countries, according to Olaug Svarva, the managing director of the fund. At the end of June the fund invested 59% in equities out of which 85% is invested in Norway and the rest in Denmark, Finland and Sweden, with 41% invested in fixed income, with the same division between Norwegian and other Nordic countries.

The Governement Pension Fund - Norway, like the global fund, was set up to support governmental savings for financing future national insurance pension fund expenditures, whereas the Government Bond Fund aims to increase liquidity and capital inflow in the Norwegian credit bond market. The Bond Fund was established in March 2009 with a capital of NOK50bn.

Folketrygdfondet manages all the assets in-house with a staff of 45 and there are no plans to outsource the assets. Svarva says there is no reason to look for external mangers as the team has built up extensive internal capabilities to cover the Nordic markets over the past 20 years.

Currently, Folketrydgfondet is reviewing its active management arrangements, prompted by the ministry of finance. Svarva says the fund continues to believe that active management does add value.

Folketrygdfondet is a large investor in a relatively small market, holding a 4.5% share of the market value of the Oslo stock exchange, and almost 10% of the index or benchmark. Svarva argues that this speaks against passive management, despite recent performance dips: "Historically we have been able to generate excess returns above benchmark with our active management so we believe strongly in it over the long term."

As a result of poor performance of domestic equities the fund returned -3.5% in the first half, losing some NOK4.2bn. In particular, falls in the energy and materials sectors were detrimental to performance. Despite the negative returns, the fund beat its benchmark index by 0.2%. Over the past 10 years the fund has had an annual return above the benchmark of 0.4%.

During the first half, Norwegian equities returned -11.3% as a result of a fall in equities towards the end of the second quarter. The positive developments in Denmark and Sweden somewhat mitigated the domestic returns by adding 7.7% to the performance. The Norwegian bond portfolio returned 5.5% and the remaining Nordic bonds returned 4.8%.

The Government Pension Fund - Norway can invest 50-70% in equities and 30-50% in fixed income. Between 80- 90% of the equity and fixed income portfolios, respectively, must be invested in Norway, with the remainder of 10-20% to be placed in Denmark, Finland and Sweden. Iceland is not part of the investment universe.

Folketrygdfondet may own up to 15% of the share capital or the basic capital in any single company in Norway. In Denmark, Finland and Sweden the fund may own shares representing up to 5% in any single company.

Up to 2.5% of the capital may be invested in unlisted Norwegian shares if the company has applied for or has specifically planned to apply for a listing. Folketrygdfondet may also retain shares in Norwegian companies that change their status to become foreign companies in connection with mergers and acquisitions.

Svarva says there are no suggestions or discussions about adding additional asset classes to the portfolio mix: "We already have a flexible mandate and we can use this to our advantage."

The ministry of finance determines the benchmark portfolio for the Government Pension Fund and the Government Bond Fund, both of which reflect the ministry's investment strategy.

Folketrygdfondet is a relative return manager and its results are compared to outperformance against the benchmark, determined by the ministry, which also determines the limit for the prospective relative volatility of the Government Pension Fund. The limit sets the extent to which the portfolio's expected returns can deviate from the benchmark portfolio returns.

The ministry has determined a strategic benchmark portfolio which consists of 40%
fixed income instruments and 60% in equities. The ministry also stipulates that the prospective relative volatility, or tracking error, on an annualised basis should be a maximum of 3 percentage points.

As part of its ethical investment principles, the finance ministry may decide to exclude firms from the investment universe of Folketrygdfondet.