norway’s government pension fund and challenges of capital ...power financial investor long term...
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Norway’s Government Pension Fund and Challenges of Capital Flows
International Forum of Sovereign Wealth Funds
3 October 2013
Yngve Slyngstad, Chief Executive Officer
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The Government Pension Fund Global
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Sources: Facts – The Norwegian Petroleum Sector 2012; Statistics Norway, Ministry of Finance, NBIM
From resource to financial wealth
0
1
2
3
4
5
6
7
8
1999 2009 2030
Per
cent of N
ational w
ealth
S
To safeguard and build financial wealth for future generations
4
Large annual inflowsGovernment revenue from exploration, billions of kroner
Sources: Facts – The Norwegian Petroleum Sector 2013, Ministry of Petroleum and Energy; Revised National Budget 2013, Ministry of Finance
-5
0
5
10
15
20
25
30
-50
50
150
250
350
450
550
73 77 81 85 89 93 97 01 05 09 13
Petroleum Taxes
SDFI
Other (incl. Statoil dividend)
Projection
Inflows as percent of mainland GDP(right hand side)
5
A large fund Billions of US dollar and percent of Norwegian GDP
Source: Ministry of Finance (Revised National Budget 2013), NBIM
USD 788bn
Per cent of total GDP(right-hand axis)
0
50
100
150
200
250
0
250
500
750
1 000
1 250
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
6
Stortinget
(Norwegian Parliament)
Ministry of Finance
Norges Bank Executive Board
NBIM
Government Pension
Fund Act
• National Budget
• Annual white paper
• National Accounts
Mandate• Quarterly and annual reports
• Investment strategy advice
A fund owned by the Norwegian people
7
Petroleum revenues
+ return on investments
Pension Fund Global Transfer to finance
non-oil budget deficit
Non-oil revenues
Expenditures
Pension Fund
GlobalFiscal Budget
Fiscal policy guideline
(over time spend real return of the fund, estimated at 4%)
Fiscal policy guideline – 4% real return
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Investment objectives
High return and moderate risk
Maintain international purchasing power
Financial investor
Long term
investor
Large
No fixed
liabilities
9
The investment strategy
10
What we invest inStrategic asset allocation
Source: NBIM
11
Why invest as we doReal returns (1900=1 USD)
Source: NBIM; Dimson, Marsh and Staunton
0
1
10
100
1,000
0
1
10
100
1,000
1900 1920 1940 1960 1980 2000
Bonds
Equities
Bills
12
Historic returnAnnualised real returns on major asset classes, percent
Source: Dimson, Marsh and Staunton
0.1
5.2 5
6.1
4.3
1.8
-0.3
1.0 0.9
-1
0
1
2
3
4
5
6
7
-1
0
1
2
3
4
5
6
7
2000-2012 1963-2012 1900-2012
Equities
Bonds
US Bills
13
Government bonds’ real yieldsPercent
-1%
0%
1%
2%
3%
4%
-1%
0%
1%
2%
3%
4%
06 07 08 09 10 11 12 13
United Kingdom
Germany
United States
Source: Barclays Capital
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Real estate investmentsSelection of portfolio
UK
France
Germany
US EuropeSwitzerland
15
Asset mix of selected, large fundsData as of latest annual or quarterly reports
Source: Annual reports, NBIM calculations
GPFG
Equity
Fixed Income
Real Assets
Absolute Return
Cash/Other
ADIA
GIC
Future Fund
ABP
CPPIB
CIC
16
The challenge of ownership
17
Global EquitiesAverage ownership percentages
Source: NBIM, FTSE
0
0.5
1
1.5
2
2.5
3
0
0.5
1
1.5
2
2.5
3
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Europe
Americas, Africa and Middle East
Asia and Oceania
Global
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Responsible investor
Investor characteristics Active ownership focus areas
Financial investor
Minority shareholder
Long-term horizon
Principle based Environmental and social risks:
� Children’s rights
� Climate change
� Water management
Markets:
� Well-functioning financial markets
Corporate governance:
� Equal treatment of shareholders
� Shareholder influence and board
accountability
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Responsible ownership
Long term
Principle based
Financial investor
Minority stakeholder
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Responsible ownership – level of interaction
90%
NO
K m
rd.
NOK 38,2 billion,(Q2 2013, Nestlé)
Principles forresponsible investment
applies to all companies
Active ownership is applied at materially significant holdings
2 006 Companies
495 Companies66%
Investment analysis
Principles & expectations
Standard setting &
collaboration
Company contact
Risk analysis
Voting & elections
100%,
8 253 Companies
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Company interaction
� Voting
� Shareholder proposal
� Board nomination
� Ownership stakes
� Financial interest
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1. Disclosing voting records
2. Disclosing voting principles
3. Corporate governance advisory board
4. Non-activist dialogue
5. Company ownership limit of 10%
6. Financial interest only
Voting disclosure and ownership principles
23
Legitimacy
As global government investor, we have to be
� respected,
� (professional in the way we do business, invest, execute)
� transparent,
� (report and explain activities)
� responsible,
� (long-term focus on sustainable value creation, and ownership governance principles)
NBIM Strategy Plan 2011-2013
24
� Annual and quarterly reports
including full IFRS financial
reporting
� Complete annual holding lists
and voting records after
general meetings published
� Governing documents,
correspondence and
research on website
� All public information
published on www.nbim.no
Transparency
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Investment Strategy – Global Portfolio
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Where we invest31.12.2012
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New equity markets in 2012 and 2013
Equity
Bulgaria
Croatia
Jordan
Kenya
Qatar
Romania
Kuwait (2013)
Nigeria (2013)
Oman (2013)
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New fixed income markets in 2012 and 2013
Fixed income (currency)
Chile (CLP)
China (CNY)
Czech Republic (CZK)
Hong Kong (HKD)
Hungary (HUF)
Israel (ILS)
Malaysia (MYR)
Philippines (PHP)
Russia (RUB)
Thailand (THB)
Taiwan (TWD)
Colombia (2013) (COP)
Changing the regional allocationTarget announced in Report to the Storting Nr. 17 (2011-2012); updated 30 June 2013
Emerging markets 6%
42%
39%
19%
35%
54%
11%
Emerging markets 9%
Source: NBIM, Ministry of Finance
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30
Investments relative to GDP31 December 2012, USD billion
Source: IMF, NBIM
0
50
100
150
200
250
300
0
5 000
10 000
15 000
20 000
EU US China
GDP (left axis)
Fund's investments (right axis)
31
Size of economies and marketsBillion USD, September 2013
Source: Barclays
0
5 000
10 000
15 000
20 000
25 000
0
5 000
10 000
15 000
20 000
25 000
UnitedStates
UnitedKingdom
Japan Germany Brazil China India
GDP
Equity market cap
Bond market cap
32
Source: NBIM
Fixed-income investmentsPercent. 30. June 2013
39.5% 38.1%
25.4%
24.1% 29.5%
20.9%
6.3%5.2%
4.0%
15.4% 7.0%
9.7%
5.9 %8.8 %
8.2 %
1.7%0.6%
11.2%
7.3 % 10.8 %
20.5 %
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %
Market-weighted index* Share of fund's investments GDP-weighted portfolio
Other emerging
CNY
Other developed
JPY
GBP
EUR
USD
* The market-weighted index is based on the Global Aggregate and EM Local Currency Government Universal indices of Barclays
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The challenges to free capital flows
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Capital controls on inflows
“if the economy is operating near potential, if the level of reserves is
adequate, if the exchange rate is not undervalued, and if the flows are
likely to be transitory, then use of capital controls—in addition to
both prudential and macroeconomic policy—is justified as part of the policy toolkit to manage inflows.”
IMF Staff Position Note
SPN/10/04
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Brazil’s IOF tax on fixed income inflows
-4
-2
0
2
4
6
8
-10
-5
0
5
10
15
20
31/12/2004 29/12/2006 31/12/2008 31/12/2010 31/12/2012
BOP, Financial Account, Foreign Portfolio Investment, Net, bnUSD - Brazil (LHS)
USDBRL Curncy (RHS)
IOF (RHS)
2004 2006 2008 2010 2012
Source: Central Bank of Brazil, Bloomberg, Itau, Natixis
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OECD Declaration on Sovereign Wealth Funds and recipient country policies
� No protectionist barriers to foreign
investment
� No discrimination among investors
� Investment restrictions only if
legitimate national security concerns
� Restrictions should be transparent
and predictable
Source: OECD
37
Asset distribution – government fundsTrillion US Dollars
Source: Bloomberg, Sovereign Wealth Funds Institute, OECD Global Pensions Statistics
12
32
25
0
5
10
15
20
25
30
Central bank reserves Resource funds Currency funds Pension fund assets
38
Central bank reserve assets are risingTrillion US Dollar
Source: Bloomberg
0
2
4
6
8
10
12
0
2
4
6
8
10
12
03 04 05 06 07 08 09 10 11 12 13
International Reserve Assets
39
Growth in global debt securities outstandingTotal debt securities, trillion US dollars, September 2013
0
10
20
30
40
50
60
70
80
90
100
Dec.89 Dec.92 Dec.95 Dec.98 Dec.01 Dec.04 Dec.07 Dec.10
General government
Financial corporations
Non-financial corporations
Source: BIS
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