return and risk - Norges Bank Investment Management

The fund's equity benchmark versus the FTSE Global All Cap Index (GEISAC) by ...... Apple Inc. Technology. 44,965. 4,648. 49,613. Royal Dutch Shell PLC.
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RETURN AND RISK GOVERNMENT PENSION FUND GLOBAL

/2016

No. 02

Performance and risk 2015 | Government Pension Fund Global

Contents 2016 1

2

3

INVESTMENTS

RETURN

RISK

1.1 The fund’s index________2

2.1 Return________________34

3.1 Risk___________________52

1.2 Investments___________28

2.2 Relative return________42

3.2 Relative risk___________56

2.3 Return and cost_______48

3.3 Return and risk________62

APPENDIX Factor and risk-adjusted returns_____________________________ 70

The fund’s index The total return on the fund over time will to a large extent be determined by developments in the broad markets in which the fund is invested. The strategic benchmark index defined in the management mandate from the Ministry of Finance captures developments in these markets.

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Norges Bank Investment Management manages the fund on behalf of the Ministry of Finance. Our mission is to safeguard and build financial wealth for future generations. Key decisions on fund strategy are anchored in the Storting (the Norwegian parliament). Our investment mandate is laid down by the Ministry of Finance on the basis of the Storting’s deliberations. The most important strategic decisions in terms of the risk and return profile relate to which types of assets the fund can be invested in and how much is to be invested in each of these asset classes. The investment universe is restricted to investments in listed equities, tradable fixedincome instruments and unlisted real estate. In addition, the fund may invest in unlisted companies where the board has expressed an intention to seek public listing. The strategic asset allocation is defined by the strategic benchmark index which until 31 December 2016 was made up of 60 percent equities, up to 5 percent real estate and 35–40 percent fixed income. If the equity allocation in the benchmark index moved above 64 percent or below 56 percent, the benchmark index is rebalanced back to 60 percent. The fund’s return is measured in a basket of international currencies corresponding to the currency composition of the benchmark index for fixed income and equities. Since February 2016, the scope for deviation from the strategic benchmark index has been given by a tracking error limit of 125 basis points.

Investments | Return and risk 2016 | Government Pension Fund Global

The strategic benchmark index The composition of the strategic benchmark index has evolved over time, but it was made up of listed equities, fixed income and real estate at the end of 2016. The sub-indices for equities and fixed income were based on publicly available, widely used, investable indices. This helps to ensure transparency and tractability. For unlisted real estate there is no investable index. Real estate investments were therefore included in the strategic benchmark index at their actual value. In 2016, the Ministry of Finance announced that they planned to change the composition of the strategic benchmark index. As of January 2017, the strategic benchmark index is made up of listed equities and bonds only with 62.5 percent in equities and 37.5 percent in fixed income. The fund may still be invested in unlisted real estate. The decision about how much and how to invest in unlisted real estate has, however, been delegated to Norges Bank as the manager of the fund within the overall limits laid down in the mandate. Benchmark index for equity investments The benchmark index for equities is based on the FTSE Global All Cap, which is a global market-capitalisation-weighted index covering approximately 7,700 stocks, or roughly 98 percent of the world’s investable market capitalisation, in 47 countries. FTSE conducts an annual review of all countries in the index, as well as those being considered for inclusion,

INVESTMENTS

a