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1
Government Pension Fund – GlobalManaging a Sovereign Wealth Fund
25 September 2007
Martin SkanckeDirector General
Asset Management Department
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Norwegian Ministry of Finance
Large Sovereign Wealth Funds
Source: Peterson Institute for International Economics
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Norwegian Ministry of Finance
Topics
Macroeconomic roleGovernance and transparencySWFs in an international contextConclusions
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Norwegian Ministry of Finance
Wealth management – from theory to practice
• Stabilization: Spending must be separated from current (volatile) oil & gas income
• Savings: Fiscal policy must take account of transitory nature of revenues
t 0
Extraction Path
Consumption path after discovery
Time
Consumption path before petroleum discovery
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Norwegian Ministry of Finance
What can a fund do?
• A petroleum fund can support fiscal management if it: Enjoys wide political and public support Operates under clear rules Stores genuine savings
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Norwegian Ministry of Finance
What can a fund not do?
• A fund can never be a substitute for sound fiscal management Main priority must be to
design a good budget process which integrates oil revenue
develop a sustainable fiscal policy strategy build institutions that are competent, transparent
and accountable only THEN does it make sense to think about the role
of a fund
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Norwegian Ministry of Finance
The Norwegian petroleum fund model
• Fund is fully integrated with the state budget
a tool to strengthen the budget process
building on existing institutions
• Fund is only invested abroad in financial assets
protect domestic economy
risk diversification and maximize returns
financial investor
• A high degree of transparency
build public support for management of oil revenues
minimize risk of bad governance and corruption
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Norwegian Ministry of Finance
Return on investments
Fund Transfer to finance non-oil budget deficit
Revenues
Expenditures
State Budget
The Fund mechanism – integrated with fiscal policy
Fiscal policy guideline(over time spend real return of the fund,
estimated at 4%)
Petroleum revenues
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Norwegian Ministry of Finance
Benchmark for the Pension Fund – Global
Equities 60 % Fixed Income 40 %
America and Africa
35 %
Asia and Oceania
15 %
America and Africa
35 %
Europe
60 %
Asia and Oceania 5
%
Equity index:
FTSE All-Cap Index Approx. 7000 equities
Fixed income index:
Lehman Brothers Global Aggregate/Global Real Government / Agency / Corporate / Securitized Approx. 7500 bonds
Strategic benchmark
Europe
50 %
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Norwegian Ministry of Finance
Topics
Macroeconomic roleGovernance and transparencySWFs in an international contextConclusions
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Norwegian Ministry of Finance
Pension Fund - Global Governance Structure
Ministry of Finance
Regulations
Performance reports
Norges Bank Investment Management / NBIM
Norwegian Parliament
Pension Fund Act
Performance reports and strategic changes reported in National Budgets and National Accounts
Legislator
Principal
Manager
Management agreement
Office of the Auditor General
Norges Bank AuditAdvisors
Advisory / consultancy agreement
Founded on Act, regulations and separate contracts
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Norwegian Ministry of Finance
Asset management: Clear lines of responsibilities
• Ministry of Finance – “Owner” overall responsibility strategic asset allocation (benchmark + risk limits) monitoring and evaluating operational management ethical guidelines reports to Parliament
• Central Bank – “Manager” implement investments strategy (benchmark) active management to achieve excess return risk control and reporting exercise the Fund’s ownership rights provide professional advice on investment strategy
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Norwegian Ministry of Finance
Ethical guidelines and corporate governance
Two main ethical obligations:
1) The obligation to ensure sound financial returns so that future generations will benefit from the petroleum wealth.
2) The obligation to respect fundamental rights for those who are affected by the companies in which the Fund invests.
• Exercise ownership rights – corporate governance
• Avoid investments in companies whose practices constitute an unacceptable risk that the Fund is or will be complicit in grossly unethical activities
Future work on ethical guidelines:• International seminar on ethics in investment management– January 2008• Evaluation process to be initiated in 2008, report presented to the Norwegian Parliament in
spring 2009
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Norwegian Ministry of Finance
Benefits of transparency
• Builds trust – necessary to achieve public support and legitimacy in managing sovereign wealth
• Disciplinary effect – pressure to deliver sound financial returns
• Contributes to stable international financial markets
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Norwegian Ministry of Finance
Topics
Macroeconomic roleGovernance and transparencySWFs in an international contextConclusions
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Norwegian Ministry of Finance
SWFs’ growing role in international financial markets – selected aspects (1)
Well functioning financial markets are good for everyone:
Allow capital exporters to Decouple consumption and current revenues Improve risk/return ratio on savings
Allow capital importers to Decouple investments and domestic savings Improve productivity through productive
investments
A sensible management of oil-producing countries’ petroleum wealth in well functioning financial markets is in everyone’s interest
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Norwegian Ministry of Finance
SWFs’ growing role in international financial markets – selected aspects (2)
Typical characteristics of SWFs are:
• Long investment horizon• No leverage• Absence of imminent claims for the withdrawal of funds
SWFs in general have strong risk-bearing capacity and may provide a stabilizing role – offsetting possible predominance of short-term investors
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Norwegian Ministry of Finance
SWFs’ growing role in international financial markets – selected aspects (3)
• SWFs’ are large – potential market movers Lack of transparency may make SWFs less predictable
and even increase volatility in some situations Regulation and supervision?
• State controlled investment vehicles – suspicion of whether political objectives are guiding investment decisions May encourage financial protectionism, but equal
treatment of shareholders is a fundamental principle
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Norwegian Ministry of Finance
Topics
Macroeconomic roleGovernance and transparencySWFs in an international contextConclusions
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Norwegian Ministry of Finance
Conclusions
• A well functioning international financial market is to everyone’s advantage
This should be the backdrop of any discussion on the role of SWFs
• SWFs may contribute to increased stability in financial markets
Long time-horizon No liabilities Little or no need for liquidity in the short term
• Transparency is key Builds trust and confidence – domestically and
internationally Has disciplinary effect on management