Advice on equity allocation of the Government Pension Fund Global

In a letter of 12 February 2016, Norges Bank was requested to assess whether the relationship between expected return and risk for equities and bonds respectively had changed since the equity share was evaluated and changed in 2006, and whether there are conditions that warrant a change in equity share in the fund’s strategic benchmark index. The Bank was further requested to provide an estimate of expected returns of the Government Pension Fund Global in the coming 10-15 years for different equity shares.

The Executive Board of Norges Bank advises the Ministry of Finance to increase the equity share in the fund’s strategic benchmark index to 75 percent. The analyses underpinning the advice are presented in four Discussion Notes published on www.nbim.no.

In its letter of 1 December 2016 to the Ministry of Finance, Norges Bank emphasises the following:

• The expected average annual real return on a portfolio with 40 percent bonds and 60 percent equities is estimated at 2.1 percent over 10 years and 2.6 percent over 30 years. If the equity allocation is increased to 75 percent, the expected average annual real return over 10 years increases to 2.5 percent and to 3.5 percent over 30 years.
• The expected volatility of a portfolio comprising 75 percent equities and 25 percent bonds is currently lower than it was reasonable to assume in 2006. The expected excess return of equities over bonds currently appears to be somewhat higher, and the fund now accounts for a much larger proportion of total petroleum wealth.
• As is the case today, there will be considerable volatility in the value of the fund. A high equity share presupposes that the investment strategy can be maintained.

The transition towards a new equity share must be implemented over time.

Letter from Norges Bank to the Ministry of Finance 
Speech by Deputy Governor Egil Matsen (www.norges-bank.no) 
Discussion Notes