The return on the Government Petroleum Fund was 12.6 per cent (measured in international currency) in 2003. This is the Fund’s highest ever return. The solid result is due to high returns on equity investments amounting to 22.8 per cent. The return on the fixed income portfolio was 5.3 per cent.
Measured in Norwegian krone, the return in 2003 was NOK 91.1 billion. Since 1997, the average annual real return after management costs has been 3.7 per cent, measured in international currency.
Substantial fluctuations in international capital markets have had an impact on the Petroleum Fund’s returns ever since the Fund was established in the second half of the 1990s. Returns on equity investments have varied from 34.8 per cent (1999) to -24.4 per cent (2002). Returns on fixed income investments have fluctuated considerably less and have ranged from 9.9 per cent (2002) to -1.0 per cent (1999).
The Petroleum Fund has a long time horizon. Thus in isolation, fluctuations in annual returns are not a problem. In economic terms, it may be formulated in the opposite way: It is the risk associated with equity investments, which is reflected in the fluctuating returns, that generates a higher return for equity investments over time.
However, such fluctuations may be a problem if the willingness to take risk declines during periods of economic contraction. The strategy laid down by the Ministry of Finance for the Petroleum Fund implied quite the reverse, that when the equity market was near the trough, all new capital transfers to the Fund would be used to purchase equities. The fact that the strategy is robust to fluctuations in return is one of the Petroleum Fund’s strengths.
The Ministry of Finance has defined a clear mandate for Norges Bank’s management of the Petroleum Fund. Norges Bank shall seek to achieve an excess return in relation to a benchmark portfolio. The return on the Petroleum Fund was 0.59 percentage point higher than the return on the benchmark portfolio in 2003. This is the sixth consecutive year with an excess return. The total gross excess return in this period has been NOK 9.4 billion.
Management of the Government Petroleum Fund is demanding. Norges Bank places considerable emphasis on managing the Petroleum Fund in a prudent and cost-effective manner, with very strong focus on risk management and measurement of positions and performance. Management costs are low compared with the costs of managing comparable funds. There were no significant breaches of the limits and guidelines established by the Ministry of Finance in 2003.
Norges Bank wishes to provide broad information about the management of the Petroleum Fund. We hope that this annual report will contribute to achieving this objective.