We use a range of investment strategies to manage the fund in a risk-controlled manner, aligned with our mandate. We will exploit our characteristics as a large and long-term investor to achieve the highest possible return in a responsible way.
We manage the fund on behalf of the Norwegian people. Responsible and long-term management ensures that the fund will benefit both current and future generations.
Our people, technology, and processes are key to achieving our goal. We shall be a diverse and inclusive organisation where we all work towards our mission to safeguard and build wealth for current and future generations. To succeed in a challenging, fast-paced working environment, we also believe it is important to have fun at work. We want to be the leading large investment fund in the world.
The Ministry of Finance decides the overall investment framework through our management mandate. The mandate specifies which asset classes we can invest in, defines the benchmark index, and lays down certain constraints and requirements. We manage the fund with the objective of achieving the highest possible return after costs with acceptable risk. We place great emphasis on being a responsible investor.
The fund strategy has been developed gradually over time. We contribute to the development of the fund’s investment strategy through our role as an advisor to the Ministry of Finance. Proximity to the portfolio and our experience from the management of the fund provide good basis for strategic advice to the asset owner. We have a dedicated team responsible for preparing advice to the Ministry and doing supporting analysis relevant for the development of the fund’s investment strategy. We develop customized analytical tools and make extensive use of internal and external data sources. To further support our advisory activities and assure the quality of our work, we collaborate with peers and academics.
Central to the management mandate is the benchmark index consisting of 70 percent equities and 30 percent fixed income. We manage the fund close to this index. However, we believe some investment opportunities diversify the fund beyond the reference index, particularly unlisted assets. All our investment processes have active elements. This improves our ability to achieve the highest possible return and to be a responsible owner.
We take advantage of the fund’s long horizon and limited short-term liquidity needs when we invest. We can withstand large fluctuations in the fund’s value and make investments whose underlying value may take a long time to realise. Our long horizon enables us to act differently from other investors in difficult and illiquid markets. We believe that the most profitable investment opportunities arise in volatile markets.
The fund’s size offers economies of scale. We can be innovative and implement new ideas at little additional cost. Being a large active participant in capital markets makes us an attractive business and trading partner. The fund’s size can also provide investment opportunities in unlisted markets, that might not be accessible to all investors.
Financial markets are constantly evolving. As an active and responsible investor, we must be willing and able to quickly adapt to new risks and opportunities. We believe speed is a mindset and that organisations that can make the right decisions quickly, generally outperform. To succeed, we will work hard to promote efficiency in all processes. We will avoid complacency and hubris.
We use a range of investment strategies in our management of the fund. They are grouped into three main categories: market exposure, security selection, and fund allocation. Our investment strategies are complementary and tailored to our characteristics – a large fund with a long horizon. We report risk and performance according to these three main strategies. The three main strategies are pursued across equity, fixed income, and real asset management.
In this strategy period we will strengthen our long-term mindset, be patient, and vary active risk as market conditions change. This allows us to take advantage of the best opportunities when they arise. Variations in asset prices can be related to behavioural factors or leverage causing pro-cyclicality. Long-term investors are well-positioned to take advantage of such variations. We will seek to buy when others want to sell and sell when others want to buy.
The fund’s benchmark index consists of 70 percent equities. Our equity management is based on two main strategies: market exposure and security selection based on fundamental research. These strategies enable us to achieve exposure to the broad equity market as expressed in our equity benchmark, while at the same time enhancing returns based on company analysis.
Market exposure
We manage the largest part of our equity portfolio internally through our market exposure strategy. We invest broadly in the companies in the benchmark but seek to avoid mechanical benchmark replication with its high trading costs. We also enhance return by following a diversified set of index refinement strategies, such as corporate action and capital market strategies.
For a large fund, it is critical to manage and trade the portfolio efficiently. This is particularly important going forward, with potentially large capital flows in and out of the fund combined with large market fluctuations.
Our size makes us an attractive partner in capital market events. Investors who are passive in such events may risk less allocation than desired. To reduce the likelihood of this, we work actively with facilitators and companies considering such transactions. A large, stable capital base and the best credit standing also make us an attractive partner for securities lending. The fund’s characteristics enable us to achieve higher earnings on securities lending than the average investor.
Security selection
Our security selection strategy is based on fundamental research. In this strategy, we benefit from our unique access to companies as a large and long-term owner. We will continue to access companies directly to deepen our understanding of industry and company dynamics. Our internal and external managers are specialists who have built strong skills in collecting and analysing information. Specialised expertise and delegated authority enable investment decisions independent of consensus.
The fund’s benchmark consists of 30 percent fixed income. The fund is invested in a broad range of bonds issued by governments and related institutions, as well as companies. The main purpose of our fixed income portfolio is to dampen fund volatility, provide liquidity, and harvest risk premia in the bond market.
Fixed income management is based on two main strategies: market exposure and security selection based on fundamental research. In the strategy for market exposure, we seek to achieve the desired benchmark exposure as cost-effectively as possible while ensuring that the fixed income portfolio fulfils its objective. We also enhance returns by being active in capital market events and taking more short- to medium-term positions based on fundamental research and temporary differences in prices of similar bonds. In our strategy for security selection, we seek to improve returns through in-depth company analysis and by harvesting risk premia in the corporate bond market.
We invest in real assets to improve diversification as part of our fund allocation strategy. Our real asset investments include listed and unlisted real estate and unlisted infrastructure for renewable energy. The fund’s characteristics make us an attractive partner for unlisted investments and provide investment opportunities that might not be accessible to all investors. We invest alongside high-quality partners with extensive sector experience both within real estate and renewable energy infrastructure. We want to build long-term relationships with our main partners.
Real estate
Renewable energy infrastructure
The management mandate requires responsible investment to be an integral part of the management of the fund. Responsible investment and active ownership support long-term value creation and our goal of highest possible return. Managing climate-related risks and opportunities is a key priority. We have a financial interest in an orderly energy transition in line with the Paris Agreement. We will drive the companies we invest in towards net zero emissions by 2050.
We work with responsible investment and ownership at three levels. We work at the market level to elevate global standards for all companies. We work at the portfolio level to monitor Environment, Social and Governance (ESG) information and integrate this into the management of the fund. We work at the company level to promote good governance and sustainable business practices. We will be a transparent and result-oriented owner. We will continue to develop our activities in collaboration with companies, peers, academia, and other stakeholders.
We engage with standard setters, market participants, and exchanges to promote well-functioning and efficient markets. International principles contribute to improved standards in all markets.
We invest globally and our investments are exposed to environmental and social developments that affect the global economy. We want our investments to be resilient to the effects of such developments.
We promote long-term value creation in the companies we invest in and lend to. We set clear goals for all ownership activities. We prioritise stewardship engagements with our largest holdings and companies with material sector and company specific risks.
Technology is key to fulfilling our management assignment in a secure and robust way. Our IT infrastructure is based on a cloud platform, which ensures flexibility and scalability. We focus on innovation and building our own solutions with our own people. To succeed, we need to attract, develop, and retain the best people.
Our investment processes are technology-driven and based on vast amounts of data and analytics. It is crucial that we strike the right balance between internally built solutions and external solutions for the efficiency and robustness of these processes.
We will create a leading technology community within our organisation and be a magnet for technology talents within the financial sector. We will continue to invest in our solutions and people, to ensure technology development is as efficient as possible.
Operational robustness is essential to achieving our goal of highest possible return in a secure and cost-efficient way. We have comprehensive compliance and risk management frameworks where risks are identified, assessed, and integrated in our decision processes. A strong compliance and risk management culture is critical for an effective control environment. We will safeguard Norges Bank’s legal, tax, commercial, and operational interests through use of appropriate legal means.
Our management assignment is complex and involves a high number of transactions and processes. We have chosen to have one global custodian to enable a robust and efficient model for instructing transactions and for safekeeping our assets. Despite a high degree of automation, the efficiency of our processes ultimately relies on our people.
Geopolitical risk could become more important in the management of the fund in the coming years. Also, organised cyber-criminals are becoming more specialised, sophisticated, and well-funded.
People are the driving force behind our success and our most important resource. We will grow the organisation in prioritised areas to ensure capacity, quality, and robustness. However, we will remain lean, flexible, and cost-efficient. To succeed in a challenging, fast-paced working environment, we believe it is important to have fun at work.
We want to be a diverse and inclusive organisation where we all work towards a common goal. The more diverse we are, the broader our perspectives will be, the more creative we become, and the better decisions we make. We must be willing to experiment, fail, and to learn from our mistakes.
We believe in life-long learning and continuous feedback. We have defined three areas where we want all employees to develop: data analytics, feedback, and simplification. These are competencies we believe are crucial to our organisation.
The strength of our teams determines our success. Teamwork is a force multiplier.
Managing the fund on behalf of the Norwegian people requires transparency. Transparency builds trust and knowledge about the fund, both in Norway and internationally.
Our main target group is our owners – the Norwegian people. We will place particular emphasis on reaching younger target groups where the knowledge about the fund is lower. As the world’s largest public investment fund, international target groups are also important for the fund.
Through our communication we want to achieve a good understanding of our core mission, how we work in the fund, the risks the fund is exposed to, and how we exercise our role as an owner. We will have a special focus on spreading knowledge about our investment strategies and how we use technology. To achieve this, we need to communicate complex messages in a simple way.
A high-performing organisation depends on efficient internal communication. Internal communication is a driver for strategy execution, employee engagement, and culture building. We will further develop our internal channels and events to ensure efficient communication.
The Government Pension Fund Global is owned by the Norwegian people, represented by the Government and the Storting (Norwegian parliament). The Ministry of Finance holds the formal responsibility for the management of the fund. Norges Bank carries out the operational management of the fund, within the management mandate stipulated by the Ministry. The investment objective of the fund is to achieve the highest possible return after costs, given an acceptable level of risk. Within the scope of this objective, the fund shall be managed responsibly.