Annual report 2000

In 1999 the situation was the exact opposite, with a very high return in equity markets but a slightly negative return on fixed income instruments. While the country contributing most to the return in 1999 was Japan, in 2000 Japan accounted for the largest negative contribution.

The past few years have shown how widely international capital markets can fluctuate, and the advantages for a large investor of being able to diversify the portfolio over several asset classes, across a number of countries and, within each market, across a large number of securities. At end-2000, for instance, the equity portfolio, which accounts for approximately 40 per cent of the total portfolio, was spread across more than 1700 equities in 21 countries.

Nevertheless, despite the fact that the management strategy stipulated by the Ministry of Finance ensures risk diversification, it is natural to expect substantial fluctuation in the annual returns. The capital in the Petroleum Fund will probably not be used for some time to come, and it is therefore important to focus on the performance over several decades.

Measured in terms of an international currency basket, the return in 2000 was 2.5 per cent. Measured in NOK, the return was 6.5 per cent. However, it is the return measured in terms of the international currency basket that best expresses Norway’s future international purchasing power. This is why the main emphasis is on publishing the return figures in foreign currency.

In 2000 there was a negative return on equities of –5.8 per cent (measured in terms of the currency basket), while there was a positive return on fixed income instruments of 8.4 per cent. Over the three-year period 1998–2000, the average annual return on the total portfolio was 8.0 per cent, consisting of 12.7 per cent on equities and 5.5 per cent on fixed income instruments.

Adjusted for inflation in the markets in which the Petroleum Fund is invested, the real annual return for the three-year period was 6.5 per cent. This is probably higher than the real return level we can expect in the long term.

One important objective for Norges Bank's management of the Petroleum Fund is outperformance of the benchmark portfolio defined by the delegating authority. In 2000, the excess return achieved by Norges Bank was 0.2 percentage point. Over the past three-year period, the average annual excess return has been 0.55 percentage point.

Another important objective is to create confidence that management of the Fund is conducted in a professional, prudent manner. Transparency is vital for building confidence. This annual report presents the results, and provides an account of Norges Bank's management of the Petroleum Fund. Further documentation and background information is available on the Norges Bank website: www.norges-bank.no.