Fund management

The Ministry of Finance has defined our investment universe through a mandate to Folketrygdfondet, specifying which companies we can invest in and where we can invest. We are a relative manager. This means that in our ongoing investment activities, we ourselves choose which companies and sectors we want to be overweight or underweight compared to the benchmark index. We employ three investment strategies in our equities management to generate higher returns than the benchmark index over time. They are greater exposure to quality companies, avoiding overoptimism and capitalising on structural trends.

Our investment decisions are based on team-based management. The bulk of our investment activities entail analysing individual companies, where we use both a qualitative and quantitative approach to find the quality companies we want greater exposure to, as well as the companies where we want to avoid overoptimism with a smaller exposure. Opportunities and risks related to ESG are integrated into the analysis. We also analyse the portfolio from an overall perspective to identify deviations from the benchmark, both qualitatively and quantitatively speaking.

In fixed income management, five different elements have been identified as central to the work of generating excess returns: portfolio optimization, structural premiums, time-varying premiums, interest rate strategies, and derivative strategies.

Fixed income management involves the buying and selling of bonds, which are essentially "loans that can be bought and sold." In other words, we are a lender that lends money in the form of bonds. These can be traded in the market. The owner of a bond is the lender, while the issuer is the borrower. Bonds are an alternative to traditional bank loans for the borrower. We lend money to both states and companies, which must be repaid at a specific time.

We earn money on our fixed income management in the form of coupons ("interest") as compensation for the risk we take on as a lender, including the risk of default and liquidity. We adjust the bond portfolio's exposure to companies and interest rates to maximize returns, which will typically also include a price change due to altered risk.

Derivative strategies aim to create added value based on the unique characteristics of Folketrygdfondet and GPFN. The instruments within derivative strategies that have been used so far are securities lending and liquidity management. A different asset class allocation than the benchmark index (higher or lower equity share) is not a strategy that is emphasized.

Through the investment mandate, the Ministry of Finance sets the limits for the financial risk that Folketrygdfondet can take. These limits are supplemented with an investment mandate from the board to the CEO. Furthermore, the CEO has established more detailed requirements through internal mandates.

We categorize financial risk into three categories: market risk, credit risk, and counterparty risk.

Market Risk

Market risk refers to the losses that can occur due to fluctuations in the prices of securities (volatility).

In the mandate for the management of the Government Pension Fund Norway, a limit for relative volatility of 3 percentage points is set, which means how much the fund's return can be expected to deviate from the benchmark index's return.

Relative volatility is influenced by several factors: the extent to which our portfolio deviates from the composition of the benchmark index, the types of securities involved in the deviation, and how these factors correlate.

In addition to the limits set by the mandate, the board has established supplementary limits to address abnormal market conditions. For both equities and currency exposure, limits are set for the highest absolute deviation between the benchmark index and the portfolio.

Credit Risk

The limits for credit risk are set to limit expected losses in the event of bankruptcy or other credit events. Credit risk refers to the potential losses that can occur if the issuer of a bond is unable to meet its obligations when the bond matures.

Folketrygdfondet's framework takes into account both the probability of bankruptcy and the expected payout (dividend) in the event of a bankruptcy of the issuer.

Folketrygdfondet's board has set maximum limits for exposure to issuers with a credit rating lower than BBB-. Additionally, the CEO has set limits for various credit ratings.

Counterparty Risk

If a counterparty goes bankrupt, losses can occur. To control this type of risk, Folketrygdfondet's board has set maximum limits for counterparty risk. A counterparty must have a rating of A- or better. The limits also include a maximum limit for exposure to a single counterparty.

The Ministry of Finance has established a benchmark index for GPFN, composed of 60 percent equities and 40 percent fixed income. The mandate also defines a framework for how much the fund's return can be expected to deviate from the benchmark index's return (expected relative volatility). The benchmark index is thus used both to manage the fund's risk and to measure the results of active management.

The benchmark index for the equity portfolio is composed of 85 percent in the main index on the Oslo Stock Exchange (OSEBX) and 15 percent in the Nordic equity index VINX Benchmark (VINXB). Icelandic companies and companies listed on the Oslo Stock Exchange are excluded from VINXB. Both indices that together make up the benchmark index for equities are adjusted for dividends. VINXB is adjusted for withholding tax on dividends to reflect Folketrygdfondet's tax position. VINXB is not currency-hedged.

The benchmark index for the fixed-income portfolio is composed of a Norwegian part at 85 percent and a Nordic part at 15 percent. The Norwegian part has a fixed government share of 30 percent at the beginning of each month and consists of the government bond index Bloomberg Global Treasury Norway, while the remaining 70 percent are non-government loans with Norwegian issuers in the bond index Bloomberg Global Aggregate.

The Nordic part of the benchmark index consists of all Swedish, Finnish, and Danish issuers in the bond index Bloomberg Global Aggregate. The loans in the Norwegian part of the fixed income benchmark index are currency-hedged, while the Nordic part is unhedged.

The management of the Government Pension Fund Norway is counter-cyclical, meaning that during periods of significant market fluctuations, we will act contrary to the market trend.

The strategic benchmark index described in the mandate is constant. However, the actual benchmark index will change due to market price developments. Over time, these price developments will cause the allocation between equities and bonds to shift in the actual benchmark index. The Ministry of Finance has established regulations that define the allowable deviations. When the limit for allowable deviation is reached, a rebalancing is carried out.

Rebalancing involves selling securities from one asset class (equities or bonds) while buying in the other. At the same time, the weights in the actual benchmark index are adjusted back to match the strategic benchmark index.

At the request of the Ministry of Finance, an annual report is conducted by the Canadian consulting firm CEM Benchmarking Inc, in which Folketrygdfondet's costs and performance are evaluated in comparison to similar managers. The reports consistently show that Folketrygdfondet's management costs related to the Government Pension Fund Norway (GPFN) are lower than all comparable funds globally.

From 2012 to 2023, the costs have also decreased from 0.094 to 0.061 percent of the average assets under management.