Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Norges Bank Investment Management Rationale for the Strategic Asset Allocation in the Norwegian Government Petroleum Fund Presentation to The Actuarial Profession Investment Conference, 26 June 2000 by Knut N. Kjær, Norges Bank Investment Management www.norges-bank.no [email protected] Norges Bank Investment Management Agenda • • • • • Background - Norway, oil and fund Strategic issues The benchmark composition Division of responsibilities Strategy to achieve excess performance • Results KAPKNK/260600 2 Norges Bank Investment Management Norway at a glance • • • • Population 4.5 mill. GDP $ 155 bill. GDP/person $ 34,600 Surplus at the central government budget: $ 15.5 bill. 10% of GDP • Surplus at the current account: $ 17.8 bill. KAPKNK/260600 3 Norges Bank Investment Management The petroleum sector • Norway is the world’s second largest net exporter of oil • Value added in production of petroleum is 16 percent of GDP • Petroleum exports representis 43 percent of total exports • 10 percent of the government petroleum revenues will be spent on the central government budget in 2000 KAPKNK/260600 4 Norges Bank Investment Management The Petroleum Fund • The Government Petroleum Fund was established by law in 1990 • The inflow to the Fund is the yearly surplus of the central government account • The first transfer occurred in May 1996 • The fund is not formally a pension fund but is used by the government to manage the budget surplus / deficit • The fund may become an important tool for coping with the financial challenges connected with an ageing population and declining oil revenues KAPKNK/260600 5 Norges Bank Investment Management Growth of the Petroleum Fund 120 100 80 60 40 20 Capital (Bill. USD) Net budget surplus KAPKNK/260600 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 19 96 0 Estimates 6 Norges Bank Investment Management Strategic issues • From petroleum to financial assets • Macroeconomic concerns • Pension system and expenditures KAPKNK/260600 7 Norges Bank Investment Management From petroleum to financial assets • Investments in the Petroleum Fund represent a diversification of national wealth from petroleum in the ground to financial assets • Simple efficient frontier analysis based on historical data shows that this transformation reduces risk and increases return KAPKNK/260600 8 Norges Bank Investment Management Percentage of GDP Petroleum and financial wealth 250 200 150 Petroleum w ealth Sum 100 50 Financial w ealth 0 1970 1980 1990 2000 2010 2020 2030 2040 2050 Illustration from Governm ent Long Term Program m e 1997 KAPKNK/260600 9 Norges Bank Investment Management Norway’s national wealth Percentage distribution 79.676.6 80 70 60 50 40 1997 2030 30 20 10 0 13.315.6 6.5 1.2 Oil and gas KAPKNK/260600 6.6 0.6 Financial Fixed assets assets Human capital 10 Norges Bank Investment Management Macroeconomic concerns • How much of the petroleum revenues can be used in the mainland economy? • How can one avoid turning the Petroleum Fund investments into a “second budget”, undermining the role of the parliament in the ordinary budget process? KAPKNK/260600 11 Norges Bank Investment Management Use of the Petroleum Fund • Petroleum Fund Act: – The capital of the Fund may only be used for transfers to the central government budget pursuant to a resolution by the Storting (Norwegian parliament). The capital of the Fund may not be used for any other purpose, including the provision of credit to central government or to private sector entities. KAPKNK/260600 12 Norges Bank Investment Management Why does the Fund invest abroad? • Budget concern – The Petroleum Fund should not be a second budget • Monetary policy concern – The petroleum activity yields substantial currency income – Accumulation of foreign reserves counteracts appreciation of the currency • Sector balance concern – Real appreciation would shift resources to noncompetitive sectors ; avoid “Dutch disease” • Investment concern – Better return on risk abroad KAPKNK/260600 13 Norges Bank Investment Management Share of government petroleum income invested in the Petroleum Fund 100 % 80 % 60 % 40 % 20 % 0% 1995 KAPKNK/260600 1996 1997 1998 1999 2000 14 Norges Bank Investment Management Pension system and expenditures • The core of the Norwegian pensions are publicly financed • The public pension system is a two tier compulsory system • The public pension expenditures will almost double as a share of GDP over the next 30 years • While the petroleum revenues must be expected to decrease significantly KAPKNK/260600 15 Norges Bank Investment Management Net cash flow from petroleum sector and pension expenditures (% of GDP) 18 16 14 12 %10 8 6 4 2 0 1970 KAPKNK/260600 Pension expenditures Petroleum revenues 1980 1990 2000 2010 2020 2030 2040 2050 16 Norges Bank Investment Management The benchmark composition • Following from the strategic background: The Fund shall only invest in financial assets abroad • Important issues in deciding the investment strategy -Asset classes and asset allocation -Regional allocation -Risk tolerance KAPKNK/260600 17 Norges Bank Investment Management Strategic asset allocation • Purpose of the Fund • “In terms of the Petroleum Fund, it is natural to apply a long investment horizon and to recognize the importance of preserving the Fund's international purchasing power" (Revised National Budget 1997) • Two implications – should not focus on short-term fluctuations in return – should not measure return in Norwegian kroner • The strategy was changed in January 1998 to include equities KAPKNK/260600 18 Norges Bank Investment Management Asset classes • Fixed income: At least 90 per cent of the bond portfolio shall be securities with a government guarantee and the last 10 per cent must be of investment grade quality • Private equities and properties are not yet considered KAPKNK/260600 19 Norges Bank Investment Management OLD (UNTIL 31.12.97) NEW (AFTER 31.12.97) Fixed income Equity 100% 60% 40% Number of markets 8 21 Europe: America: Asia: 75% 18% 7% 50% 30% 20% Regional weighting scheme Tracking error: KAPKNK/260600 Trading weights FI: GDP Eq: market cap 1.5% 20 Norges Bank Investment Management Determining the equity portion • “Using these historical returns (1926-1990), it would take 139 years of investing in Treasury bills to double one’s real wealth while it would take only 11 years of stock investment” Siegel (1992) • In 1997, Norges Bank advised the Ministry of Finance to invest in equities • The benchmark weight of 40 per cent can be viewed as the owners’ return-to-risk preference KAPKNK/260600 21 Norges Bank Investment Management Country allocation • As always: A trade-off between return and risk • Return – assume that expected returns in the long run are equal in all (industrial) countries • Risk - a compromise between – Hedge for currency risk of imports – Diversification of market risk – Diversification of national wealth • Size of the markets could be a restriction KAPKNK/260600 22 Norges Bank Investment Management Regional weights mainly determined by GDP-weights: KAPKNK/260600 Americas Europe Asia Old guidelines Import weights GDP weights 18 10 42 75 81 38 7 9 20 Market weights - bonds Market weights - equities New guidelines 33 55 30 47 32 50 20 13 20 23 Norges Bank Investment Management Country weights within regions • Equities: Market capitalisation weights FTSE index • Fixed Income: GDP weights Salomon Smith Barney Government Bond index • Emerging markets included in the investment universe from 1 January, 2000. Not in the benchmark yet. KAPKNK/260600 24 Norges Bank Investment Management Benchmark for the Petroleum Fund Benchmark Equities 40 % America 30 % KAPKNK/260600 Europe 50 % Asia and Oceania 20 % Bonds 60 % America 30 % Europe 50 % Asia and Oceania 20 % 25 Norges Bank Investment Management The risk tolerance given in the Fund Management Mandate • Direct restrictions on asset allocation • Limits on expected deviations from the benchmark portfolio • Bond duration between 3 and 7 • Maximum 3 per cent ownership of any one company • Limits on credit risk • General clause: Norges Bank shall ensure that satisfactory risk systems and control routines exist for those instruments to be used in the management of the Fund KAPKNK/260600 26 Norges Bank Investment Management Expected tracking error • Tracking error as a risk measure is used to limit the difference in expected return between the actual portfolio and benchmark • An upper limit of tracking error implies that the actual return with a certain probability will vary within a band around the return of the benchmark • Maxium expected tracking error is 1.5 per cent • Expected tracking error is calculated based on historical fluctuations in the price of individual securities and on the correlation in price changes between individual securities KAPKNK/260600 27 Norges Bank Investment Management Division of responsibilities KAPKNK/260600 28 Norges Bank Investment Management Petroleum Fund - Division of responsibilities • Owner: Ministry of • Manager: Norges Finance Adviser: Norges Bank – Strategic asset Bank allocation and investment universe – Benchmarks – Risk limits – Evaluates manager (uses consultant) – Reports to Stortinget KAPKNK/260600 – Achieve as high return as possible given investment mandate and restrictions – Risk control – Reports to MOF 29 Norges Bank Investment Management Properties of the fund management model • Accountability • Transparency • Focus on the contribution to value added in the operational management KAPKNK/260600 30 Norges Bank Investment Management Organisation within Norges Bank • Norges Bank Investment Management (NBIM) was established as a separate investment management unit in 1998 with “Chinese walls” to the ordinary central bank functions • NBIM manages the Petroleum Fund, the Petroleum Insurance Fund and the longterm portfolio of the foreign exchange reserves (more than NOK 400 bn in all) KAPKNK/260600 31 Norges Bank Investment Management Strategy to achieve excess performance KAPKNK/260600 32 Norges Bank Investment Management Ambition: Outperform the benchmark portfolio – Excess return should be higher than extra costs associated with active management – Outperformance must be achieved at lowest possible risk KAPKNK/260600 33 Norges Bank Investment Management Excess return at lowest possible extra cost • Distinguish between index management and active management • The core of the portfolios is index-managed Low management and transaction costs Forms a basis for focused active management • Active managers are to take advantage of competitive edges and take risks performance-based fees • Continuous monitoring of transaction costs KAPKNK/260600 34 Norges Bank Investment Management Highest possible return at lowest possible risk • Many small positions rather than a few large ones • Greatest possible independence in position-taking • Specialisation of expertise • Reasonably safe revenues receive highest priority KAPKNK/260600 35 Norges Bank Investment Management Independence in position-taking • Division into three management units • Each of these are involved in both external and internal management • In choosing external managers, great emphasis is placed on diversification KAPKNK/260600 36 Norges Bank Investment Management Risk units The basic investment decision is allocation of risk units 35 30 25 20 15 10 5 0 External Internal Tactical asset allocation KAPKNK/260600 Equities Fixed income 37 Norges Bank Investment Management Organisation of management (1) Internal management • Lending/repos - fixed income instruments • Futures overlay - risk management • Active funding of managers and investing of new capital into the market (transition) • Enhanced index management (equities and fixed-income instruments) • Active management in selected areas KAPKNK/260600 38 Norges Bank Investment Management Organisation of management (2) External management • External index management of equities (internal capacity for index management of fixed-income instruments) • External active management to achieve increased breadth in focused position-taking • External lending arrangement for equities KAPKNK/260600 39 Norges Bank Investment Management Manager selection: 4 main groups of criteria • Management ability Organisation Assets/clients Track record Inv.controls • Expected performance Research KAPKNK/260600 Pf construction Pf implementation 40 Norges Bank Investment Management External managers today • 2 global index equity managers • 7 active equity managers, 9 mandates one manager is a sector specialist • Trend in equity management: sector focus • 3 global fixed income managers • 2 - 3 tactical asset allocation mandates from third quarter KAPKNK/260600 41 Norges Bank Investment Management Monitoring external managers • Daily transfer of data on transactions and holdings via our global custodian to Norges Bank's Investment Management data records • Programme for continuous monitoring: - Compliance with guidelines - Analysis of results (attribution) - Valuation analysis - Risk analysis - Monitoring of transactions/costs KAPKNK/260600 42 Norges Bank Investment Management Information flows External management Internal management Market feeds Fixed data Manager 1 Manager 1 Custody Manager 2 Manager n KAPKNK/260600 Performance DATA WAREHOUSE Risk models Norges Bank Back Office Other uses Manager 2 Manager n 43 Norges Bank Investment Management Real Time Attribution ECONOMIC SECTOR Technology Communication Services [Unassigned] Energy Consumer Cyclicals Transportation Miscellaneous Consumer Staples Utilities Basic Materials Capital Goods Health Care Financials Total MANAGER Total Return Percent Contrib Average Percent Cap Total Return Percent Contrib Percent Cap Total Return Percent Contrib 19.40 15.69 1.77 6.08 10.12 0.89 0.00 9.86 1.48 5.43 7.62 3.17 18.50 24.68 33.24 -3.43 2.06 19.12 10.85 0.00 21.97 0.61 9.17 16.55 -3.81 6.55 4.59 4.81 -0.04 0.15 1.92 0.10 0.00 2.08 0.00 0.57 1.26 -0.14 1.25 12.47 10.35 0.00 5.01 9.49 1.03 0.16 10.41 2.23 6.32 8.88 7.31 26.34 25.62 28.12 0.00 1.40 13.30 7.81 6.84 9.61 -0.22 10.24 11.35 -4.04 6.72 2.96 2.62 0.00 0.09 1.25 0.09 0.01 0.99 0.00 0.67 1.01 -0.34 1.78 6.93 5.33 1.77 1.07 0.62 -0.14 -0.16 -0.55 -0.75 -0.89 -1.26 -4.15 -7.84 -0.94 5.12 -3.43 0.66 5.82 3.04 -6.84 12.37 0.83 -1.07 5.20 0.23 -0.17 1.63 2.19 -0.04 0.06 0.67 0.02 -0.01 1.09 0.00 -0.10 0.25 0.20 -0.53 100.00 16.55 16.55 100.00 11.14 11.14 5.41 5.41 Total Effect Local Currency Effect Total Effect ATTRIBUTION ANALYSIS Allocation Effect Total KAPKNK/260600 PORTFOLIO VARIATION Average Percent Cap ECONOMIC SECTOR Technology Communication Services [Unassigned] Energy Consumer Cyclicals Transportation Miscellaneous Consumer Staples Utilities Basic Materials Capital Goods Health Care Financials EUROPE EX UK Security Selection Interaction Effect Effect 0.97 0.90 -0.24 -0.10 0.02 0.01 0.01 0.03 0.09 0.01 0.00 0.68 0.35 -0.10 0.46 0.00 0.03 0.54 0.04 0.00 1.24 0.03 -0.04 0.46 0.04 -0.03 -0.06 0.22 0.00 0.02 0.03 0.00 0.00 -0.11 -0.02 0.02 -0.06 -0.02 0.02 0.81 1.58 -0.24 -0.05 0.58 0.05 0.01 1.16 0.10 -0.01 0.39 0.71 0.34 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.81 1.58 -0.25 -0.06 0.58 0.05 0.01 1.16 0.10 -0.01 0.39 0.71 0.34 2.71 2.66 0.05 5.42 -0.01 5.41 44 Norges Bank Investment Management Results KAPKNK/260600 45 Norges Bank Investment Management The Government Petroleum Fund 1997-99 1997 1998 1999 97-99 Actual return 9,1 9,3 12,4 10,2 Inflation 1,8 1,0 1,2 1,3 Real return 7,2 8,2 11,1 8,8 Excess return 0,21 0,20 1,11 0,5 Transfers 60,9 32,8 24,5 165,7 incl. 1996 in billions NOK Market value 113,4 171,8 222,4 by the end of the year KAPKNK/260600 46 Norges Bank Investment Management Per cent Excess return in the Petroleum Fund 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 1998 1 KAPKNK/260600 1998 2 1998 3 1998 4 1999 1 1999 2 1999 3 1999 4 2000 1 47 Norges Bank Investment Management Expected tracking error Basis points 90 • Maximum expected tracking error is 1.5 per cent 80 70 Equities 60 50 40 Total 30 Fixed income 20 10 0 31Dec 07Jan 14Jan KAPKNK/260600 21Jan 28Jan 04Feb 11- 18Feb Feb 25Feb 03Mar 10- 17Mar Mar 24Mar 31Mar 48 Norges Bank Investment Management Management costs Equity management Fixed income man. Total 1999 0.l45 0.048 0.087 1998 0.082 0.039 0.052 Measured as a percentage of the average portfolio KAPKNK/260600 49 Norges Bank Investment Management The Fund’s Equity Assets 31 December 1999 • Number of companies of which included in the FTSE index 2025 1880 (93%) • Average holding 46 mill. (NOK) • Largest single holding Nokia, 1,445 mill. (ownership 0.086%) • Largest ownership share Buhrmann NV, 0.67% (holdings 62 mill. ) • Share of total market capitalisation KAPKNK/260600 0.039% 50 Norges Bank Investment Management Website: www.norges-bank.no KAPKNK/260600 51