Risk management
We manage the Government Pension Fund Global with the aim of the highest possible return with moderate risk. To achieve this, we need to identify, measure and manage the risks the fund faces.
To reach the aim of highest possible return we need to identify, measure and manage the risks the fund faces. We do this using a variety of models and approaches.
The fund’s exposure to market risk is determined primarily by the composition of the benchmark index. Much of the risk in the fund is driven by how much of the fund is invested in equities and how much equity prices fluctuate. Movements in interest rates, credit premiums and exchange rates also play a role.
Limits for deviations from the benchmark index
The Ministry of Finance has set limits for how far the fund may deviate from the benchmark index. The most important limit is expressed using the statistical concept of expected relative volatility, or tracking error. The limit for expected relative volatility has been set at 125 basis points. This means that the difference between the return on the fund and the return on the benchmark portfolio is expected to be more than 1.25 percentage points in only one out of every three years.
Expected relative volatility is calculated using a statistical model which estimates future market volatility on the basis of historical price movements for the various securities held by the fund. The risks to which the fund is exposed are complex, however, and cannot be captured by any single measure. We therefore use multiple approaches and metrics to assess the risk in our management of the fund.
Stress testing
Stress tests aim to quantify potential losses in drastic scenarios in order to calculate the overall impact on the portfolio. The fund performs various types of stress test, covering both historical and hypothetical events. Historical stress testing takes changes in market factors such as equity prices, yields and real estate prices in past periods of stress and applies them to the current portfolio to gauge the effect of these events on the fund’s value. As part of this historical stress testing, we calculate expected shortfall, which measures the average loss for the portfolio in the most extreme situations, defined as the worst q percent of cases. Hypothetical, or predictive, stress testing combines subjective views with historical data to define shocks for a group of systematic risk factors for a given event. These risk factors are then applied to the current portfolio to calculate the impact on the fund.
Concentration analysis
One of the simplest measures of risk in the equity portfolio is the degree of overlap with the benchmark index. This shows to what extent the equity portfolio is identical or equivalent to the benchmark index. A 100 percent overlap would mean that the equity portfolio is exactly the same as the benchmark index and has the same risk as the benchmark.
Factor exposure
Exposure to systematic risk factors such as small-cap stocks, value stocks and emerging markets normally brings higher returns, but also higher risks. It is therefore important to monitor the fund’s exposure to such factors continuously. We need both a static and a dynamic overview to manage systematic exposure to different risk factors.
Liquidity risk
Liquidity risk is about our ability to rebalance the fund and make capital available to the fund’s owner in an efficient manner. Liquidity risk is followed up partly through requirements in the mandate for how much of the fund is to be invested in government bonds. Bonds from highly rated government issuers will normally be among the most liquid investments in the fund.
Risk measures
The risks to which the fund is exposed are complex, however, and cannot be captured by any single measure. We therefore use multiple approaches and metrics to assess the risk in our management of the fund:
- Stress testing
- Concentration analysis
- Factor exposure
- Liquidity risk
Key figures for the fund's risk and exposure
| Limits set by the Ministry of Finance | 30.06.2024 | ||
|---|---|---|---|
| Allocation | Equity portfolio 60–80 percent of fund's market value1 | 72.1 | |
| Unlisted real estate no more than 7 percent of the fund's market value | 1.7 | ||
| Fixed-income portfolio 20–40 percent of fund's market value1 | 27.3 | ||
| Unlisted renewable energy infrastructure no more than 2 percent of the fund's market value | 0.1 | ||
| Market risk | 1.25 percentage points expected relative volatility for the fund's investments | 0.4 | |
| Credit risk | Maximum 5 percent of fixed-income investments may be rated below BBB- | 1.4 | |
| Emerging markets | Maximum 5 percent of fixed-income investments may be in emerging markets | 2.9 | |
| Ownership | Maximum 10 percent of voting shares in a listed company in the equity portfolio2 | 9.6 | |
| 1 Derivatives are represented with their underlying economic exposure. 2 Investments in listed and unlisted real estate companies are exempt from this restriction. |
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Risk and exposure for the equity and fixed-income investments
| Limits set by Norges Bank's Executive Board | 30.06.2024 | ||
|---|---|---|---|
| Credit risk | Maximum 2 percent of the net asset value of the fixed-income investments may be invested in a single issuer government bond rated below BBB- | 0.6 | |
| Maximum 0.5 percent of the net asset value of the fixed-income investments may be invested in other single issuer rated below BBB- | 0.0 | ||
| Overlap between actual holdings and benchmark indices | Equities minimum 60 percent | 85.8 | |
| Bond issuers minimum 60 percent | 75.4 | ||
| Liquidity | Minimum 7.5 percent of the fund shall be invested in treasury bonds from US, UK, Germany, France and Japan2 | 11.2 | |
| Leverage | Maximum 5 percent of equity and fixed-income investments | 1.2 | |
| Securities borrowing through borrowing programmes | Maximum 5 percent of the fund | 0.9 | |
| Expected shortfall | Maximum 3.75 percent of the fund's investments | 1.1 | |
| Securities lending | Maximum 20 percent of the fund | 6.3 | |
| Contract for difference gross exposure | Maximum 5 percent of the fund | 2.7 | |
| Issuance of options | Maximum 2.5 percent of the fund | 0.0 | |
| Ownership in listed real estate companies | Maximum 30 percent of voting shares in a single listed real estate company | 25.2 | |
| Assets managed by any one external manager | Maximum 0.5 percent of the fund | 0.2 | |
| Counterparty risk | Maximum 0.75 percent for any one counterparty | 0.2 | |
Risk and exposure of the fund’s unlisted real estate investments*
| Limits set by Norges Bank's Executive Board | 30.06.2024 | ||
|---|---|---|---|
| Country allocation | US: 30–70 percent of the unlisted real estate investments | 48.3 | |
| UK: 10–40 percent of the unlisted real estate investments | 19.1 | ||
| Germany: 0–20 percent of the unlisted real estate investments | 5.1 | ||
| France: 0–30 percent of the unlisted real estate investments | 15.9 | ||
| Japan: 0–20 percent of the unlisted real estate investments | 2.4 | ||
| Other countries: 0–10 percent of the unlisted real estate investments | 3.4 | ||
| Sector allocation | Office space: 40–70 percent of the unlisted real estate investments | 50.9 | |
| Retail space: 0–30 percent of the unlisted real estate investments | 12.0 | ||
| Logistics space: 0–40 percent of the unlisted real estate investments | 36.5 | ||
| Other property: 0–10 percent of the unlisted real estate investments | 0.6 | ||
| Real estate investments in emerging economies | Maximum 10 percent of the unlisted real estate investments | 1.1 | |
| Investments in real estate under development | Maximum 10 percent of unlisted real estate investments | 5.6 | |
| Investments in real estate that is vacant | Maximum 15 percent of unlisted real estate investments | 10.0 | |
| Investments in real estate in one calendar year | Maximum 0.5 percent of the fund | 0.0 | |
| Investments in interest-bearing securities | Maximum 25 percent of the unlisted real estate investments | 0.0 | |
| Debt ratio | Maximum 70 percent for any one investment | n.a. | |
| Maximum 25 percent of unlisted real estate investments | 7.7 | ||
| Investments with a single real estate investment partner | Maximum 1 percent of the fund for logistic sector and 0.5 percent of the fund for other sectors | 0.6 | |
| * Risk limits are calculated based on physical assets and excluding cash. | |||
Risk and exposure of the fund’s investments in unlisted renewable energy infrastructure
| Limits set by Norges Bank's Executive Board | 30.06.2024 | ||
|---|---|---|---|
| Direct investments in the construction phase | Maximum 40 percent of unlisted infrastructure investments | 0.5 | |
| Direct investments in the development phase | Maximum 2 percent of unlisted infrastructure investments | 0.0 | |
| Direct investments – share of business in renewable energy | Minimum 80 percent of each investment | 100.0 | |
| Debt ratio for direct investments | Maximum 60 percent of unlisted infrastructure investments | n.a. | |
| Maximum 70 percent for any one investment | n.a. | ||
| Direct investments managed by any one external manager | Maximum 0.5 percent of the fund | 0.1 | |
| Indirect investments in fund structures | Maximum 10 percent of unlisted infrastructure investments | n.a. | |
| Minimum 70 percent of fund structure's investments in unlisted infrastructure | n.a. | ||
| Minimum 70 percent of fund structure's underlying investments in OECD | n.a. | ||
Approval of financial instruments, markets and issuers of government bonds
The Ministry of Finance’s Management Mandate for the Government Pension Fund Global requires Norges Bank to approve all financial instruments, markets and government bond issuers. Approval is to be based on an assessment of all relevant investment risks and operational risks.