A long-term investor in global markets: Norway s pension fund Dag Dyrdal, Chief Strategic Relations Officer Australian Institute of International Affairs Sydney, 11 November 2010
Outline Why an oil fund? What is the set-up of the fund? Where and what do we invest in? How do we define our ownership role? 2
Why an oil fund?
Historical Context One may disregard the possibility of discovering coal, oil or sulphur on the Norwegian Continental Shelf Letter from the Geological Survey of Norway to the Ministry of Foreign Affairs, 1958
Norway s petroleum production Mill. scm oil equivalents. Actual figures and projections. 1970-2030 300 250 200 Gas Condensate NGL Oil Projections 300 250 200 150 150 100 100 50 50 0 1970 1980 1990 2000 2010 2020 2030 0 Source: Norwegian Petroleum Directorate
Net government cash flow from petroleum Billion NOK at 2010 values 450 400 350 300 250 200 150 100 50 0-50 StatoilHydro dividend Royalty and area fee SDFI Environmental taxes Taxes State net cash flow 1975 1980 1985 1990 1995 2000 2005 2010 450 400 350 300 250 200 150 100 50 0-50 Sources: Facts The Norwegian Petroleum Sector 2010, Ministry of Petroleum and Energy; Revised National Budget 2010, Ministry of Finance 6
Fund size projections Percent of GDP and in USD Per cent 250 Billions of USD (right-hand scale) USD 1 200 225 200 175 150 125 100 75 50 25 0 Per cent of GDP (lefthand scale) 1995 2000 2005 2010 2015 2020 1 000 800 600 400 200 0 Sources: Ministry of Finance, Revised National Budget 2010, and Norges Bank 7
What is the setup of the fund?
The Norwegian Fund Model The fund is fully integrated with the state budget a tool to strengthen the budget process a transfer rule allowing real return of fund to be spent annually building on existing institutions The fund is only invested abroad in financial assets protect domestic economy risk diversification and maximize returns financial investor A high degree of transparency build public support for management of oil revenues minimize risk of bad governance and corruption 9
The fund mechanism and the fiscal rule Petroleum revenues + return on investments Non-oil revenues Pension Fund Global Transfer to finance non-oil budget deficit Fiscal budget Inflows to the fund Fiscal policy guideline over time spend only real return of the fund, estimated at 4% Expenditures 10
Fund structure Norwegian Parliament Government Pension Fund Act Fund Guidelines National Budget Annual White Paper National Accounts Ministry of Finance Fund regulations Management Agreement Performance Reports Norges Bank Executive Board NBIM 11
Roles and responsibilities Ministry of Finance Norges Bank Investment Management Strategic asset allocation Transition of new assets into global capital markets Benchmark portfolios Cost efficient market exposure (Active) risk tolerance levels Create excess return through active management Company exclusions Safeguard long-term financial interests through active ownership Report to Parliament Advise the Ministry of Finance on strategic issues
NBIM Offices New York London Oslo Shanghai Singapore Oslo 1998 New York 1998 London 2000 Shanghai 2007 Singapore 2010 5 offices 20 nationalities 260 employees
www.nbim.no 14
Where and what do we invest in?
Investment Objectives High return in terms of international currency subject to moderate risk A long-term investment horizon shall be applied and short-term variations in return are less important The Fund shall be invested abroad in its entirety The Fund shall be a financial investor, not a tool for strategic ownership of individual companies, and not a foreign policy tool The Fund shall be well diversified 16
Strategic Asset Allocation Equities 60 % Bonds 35-40% America and Africa 35 % Europe 50 % Asia and Oceania 15 % America and Africa 35 % Europe 60 % Asia and Oceania 5 % Real estate 0-5% 17
Regent Street: First real estate investment 18
Equity purchases vs. the market Billion NOK and equity index (31.12.1997=100) 180 160 140 120 100 80 60 40 20 Equity purchases (left scale) Global equity index (right scale) 200 180 160 140 120 100 0 1997 1999 2001 2003 2004 2006 2008 2010 80 19
Fund return Cumulative and annualised, international currency 30 % 25 % 20 % 15 % Total absolute Equity Fixed income 30 % 25 % 20 % 15 % 10 % 5 % 0 % -5 % -10 % 4.8% 10 % 5 % 0 % -5 % -10 % 20
How do we define our ownership role?
Ownership in Global Equity Markets Percentage of FTSE All-World index s market capitalisation 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Europe Americas Asia and Oceania Globally 98 99 00 01 02 03 04 05 06 07 08 09 10 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Source: FTSE, NBIM 22
Ownership - focus areas 1. Equal treatment of shareholders 2. Shareholder influence and board accountability 3. Well-functioning, legitimate and efficient markets 4. Children s rights 5. Climate change 6. Water management 2 3
Tools of active ownership 1. Principles for corporate governance 2. Dialogue with companies 3. Voting rights 4. Shareholder proposals 5. Contact with investors and regulatory authorities 6. Legal action 7. Public views 24