20/03/2019

Return and riskGOVERNMENT PENSION FUND GLOBAL

Press seminarOslo, 20 March 2019

1

2

3

APPENDIXFactor and risk-adjusted return

RETURN

2.1 Return ___________________ 36

2.2 Relative return _____________ 44

2.3 Return and costs ____________56

INVESTMENTS

1.1 Investments _______________ 8

1.2 Reference index ___________ 16

1.3 Reference portfolio _________ 24

3.1 Risk _____________________ 62

3.2 Relative risk _______________ 70

3.3 Risk adjustments ___________ 76

RISK

Investments

3

Management of the fund

4Source: Ang et al (2014). Norges Bank Investment Management

Market

Market index

Reference portfolio

Actual portfolio

Reference indexMinistry of Finance

Norges Bank

Investment Management

Investments

Equity benchmark vs FTSE Global All Cap indexInvestments. Table 8. By country. Billions of kroner

5

-1,000

-500

0

500

1,000

1,500

2,000

2,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

UK

Germ

any

Fra

nce

Sw

itze

rla

nd

Neth

erl

and

s

Czech

Repu

blic

Ma

laysia

Norw

ay

Canad

a

US

Absolute

Deviation

Fixed-income benchmark vs the BBGA indexInvestments. Table 10. By currency. Billions of kroner

6

-400

-200

0

200

400

600

800

1,000

1,200

-400

-200

0

200

400

600

800

1,000

1,200

Euro

Me

xic

an P

eso

Sw

iss F

ranc

South

Kore

an

Won

Canad

ian D

olla

r

Ch

ilea

n P

eso

Norw

eg

ian

Kro

ne

Ind

on

esia

n R

up

iah

US

Dolla

r

Jap

an

ese

Yen

Absolute

Deviation

Reference portfolio adjustments - equitiesInvestments. Charts 5 and 7. Percent of fund

7

0

1

2

3

4

5

0

1

2

3

4

5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to universe expansion

in the reference portfolio for equities.

Over-weighted stocks

0

1

2

3

4

5

0

1

2

3

4

5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to systematic factors

in the reference portfolio for equities.

Over-weighted stocks

Reference portfolio adjustments - fixed incomeInvestments. Charts 6 and 8. Percent of fund

8

0

1

2

3

4

5

0

1

2

3

4

5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to the fiscal strength factor

in the reference portfolio for fixed income.

Under-weighted bonds

0

1

2

3

4

5

0

1

2

3

4

5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to universe expansion

in the reference portfolio for fixed income.

Over-weighted bonds

Contribution to relative return in 2018Investments. Table 14. Percentage points

9

Equity Fixed income Total

Universe expansion -0.04 -0.09 -0.13

Systematic factors -0.05 -0.05

Mandate requirements 0.01 0.01

Universe adjustments -0.02 -0.02 -0.04

Reference portfolio versus the reference index -0.12 -0.10 -0.22

Contribution to relative return 2013-2018Investments. Table 15. Annualised. Percentage points

10

Equity Fixed income Total

Universe expansion -0.01 -0.06 -0.07

Systematic factors 0.01 0.01

Mandate requirements 0.01 -0.01 0.00

Universe adjustments -0.02 -0.02 -0.05

Reference portfolio versus the reference index -0.01 -0.09 -0.11

Return

11

Absolute return - key figuresReturn. Table 18. Annualised. Percent

12

Since

01.01.1998

Last

10 years

Last

5 years2018

Return on equity investments1 5.31 10.54 5.66 -9.49

Return on fixed-income investments 4.56 4.52 3.05 0.56

Return on unlisted real estate investments2 - - 7.19 7.53

Return on fund 5.47 8.33 4.75 -6.12

1 Since 01.01.1999.2 Includes listed real estate investments from 1 November 2014 to the end of 2016.

Absolute return - 5-year bucketsReturn. Table 19. Annualised. Percent

13

1998-2002 2003-2007 2008-2012 2013-2017

Return on equity investments1 -4.85 16.28 -0.59 12.94

Return on fixed-income investments 6.26 4.00 5.87 2.96

Return on unlisted real estate investments2 - - - 8.03

Return on fund 3.19 8.92 3.14 9.26

1 Since 01.01.1999.2 Includes listed real estate investments from 1 November 2014 to the end of 2016.

14

Equity

management

Fixed-income

management

Real estate

managementAllocation Total

Fund allocation -0.32 -0.10 0.19 -0.01 -0.24

Reference portfolio -0.12 -0.10 -0.22

of which systematic factors -0.05 -0.05

Allocations -0.20 -0.01 0.00 -0.01 -0.21

Real estate 0.19 0.19

Unlisted real estate 0.24 0.24

Listed real estate -0.05 -0.05

Security selection -0.10 0.06 -0.04

Internal security selection -0.14 0.06 -0.09

External security selection 0.05 0.05

Asset management -0.06 0.04 -0.01

Asset positioning -0.02 0.02 0.01

Systematic factors -0.09 0.01 -0.08

Securities lending 0.04 0.02 0.06

Total -0.47 0.00 0.19 -0.01 -0.30

Contributions to relative return 2018Return. Table 32. Percentage points

15

Equity

management

Fixed-income

management

Real estate

managementAllocation Total

Fund allocation -0.07 -0.10 0.04 0.02 -0.10

Reference portfolio -0.01 -0.09 0.00 -0.11

of which systematic factors 0.01 0.01

Allocations -0.05 0.00 0.00 0.02 -0.03

Real estate 0.04 0.04

Unlisted real estate 0.05 0.05

Listed real estate -0.01 -0.01

Security selection 0.10 0.01 0.10

Internal security selection 0.00 0.01 0.00

External security selection 0.10 0.10

Asset management 0.10 0.08 0.01 0.18

Asset positioning 0.06 0.07 0.01 0.14

Systematic factors -0.02 0.00 -0.02

Securities lending 0.05 0.01 0.06

Total 0.13 -0.01 0.04 0.03 0.18

Contributions to relative return 2013 - 2018Return. Table 33. Annualised. Percentage points

Relative return after management costsReturn. Table 36. Annualised. Basis points

16

5 years Since inception

The fund's relative return before management

costs3 25

The fund's management costs1 -5 -8

The fund's relative return after

management costs-2 16

1 The fund’s management costs is excluding costs related to unlisted real estate prior to 2017.

Estimated relative return of a passive strategyReturn. Table 37. Annualised. Basis points

17

5 years Since inception

Management costs of a passive strategy -3 -5

Revenues from securities lending 6 6

Transaction costs related to replication of the

benchmark index-2 -4

Transaction costs related to inflows and

extraordinary benchmark changes-1 -5

Estimated relative return of a passive strategy 0 -7

Estimated relative return differenceReturn. Table 38. Annualised. Basis points

18

5 years Since inception

The fund's relative return after management costs -2 16

Estimated relative return of a passive strategy 0 -7

Estimated relative return difference -2 23

Risk

19

Equity exposureRisk. Chart 21. Percent

20

30

35

40

45

50

55

60

65

70

30

35

40

45

50

55

60

65

70

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Rolling return of 70 equity/30 fixed incomeRisk. Chart 19. 5-year rolling return. Annualised. Measured in dollars. Percent

21Source: Dimson-Marsh-Staunton Global Return Data

-10

-5

0

5

10

15

20

25

30

-10

-5

0

5

10

15

20

25

30

1900 1920 1940 1960 1980 2000

Equity contribution

70 equity/30 fixed income

The fund’s expected absolute volatilityRisk. Chart 29. Percent

22

0

5

10

15

20

25

30

0

5

10

15

20

25

30

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Source: Norges Bank Investment Management

23

Equity

management

Fixed-income

management

Real estate

managementAllocation Total

Fund allocation 11 9 26 5 30

Reference portfolio 9 9 12

of which systematic factors 7 7

Allocations 5 3 0 5 8

Real estate 26 26

Unlisted real estate 19 19

Listed real estate 9 9

Security selection 12 2 12

Internal security selection 10 2 10

External security selection 5 5

Asset management 6 2 7

Asset positioning 5 2 7

Systematic factors 3 3

Total 20 9 26 5 33

Expected relative volatilityRisk. Table 41. All numbers measured at fund level. Basis points

36-month correlationRisk. Chart 25. 10-year US yield changes vs. S&P 500 price returns

24

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

75 80 85 90 95 00 05 10 15

Source: Bloomberg

Recent and past stressed yearsRisk. Chart 22. Asset class returns. Measured in dollars. Percent

25

-50

-40

-30

-20

-10

0

10

20

30

-50

-40

-30

-20

-10

0

10

20

30

1920 1931 2002 2008

Equity

Fixed income

Source: Dimson-Marsh-Staunton Global Return Data

Fund performance in 2008Risk. Chart 23. Percent

26

-40

-30

-20

-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

30

40

Fund,USD

Fund,Currency basket

Fund,NOK

NOK/USD NOK/Currencybasket

MSCI World industry worst lossesRisk. Chart 28. 12-month and 60-month rolling basis.1970:1 – 2018:12. Percent

27

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70C

onsum

er

Sta

ple

s

Ind

ustr

ials

Health C

are

Utilit

ies

Energ

y

Ma

teria

ls

Consum

er

Dis

cre

tio

na

ry

Fin

ancia

ls

Com

mun

ication

Se

rvic

es

Info

rmation

Techn

olo

gy

12 months

60 months

Source: MSCI

Regression analysis of relative returnRisk. Table 53. Equity mgt. Measured in dollars. Before management costs

28

Sample period

Regression coefficients

Inte

rce

pt,

bp

s

an

nu

ali

se

d

Ma

rke

t

(MK

T)

Sm

all

vs

La

rge

(SM

B)

Ch

ea

p v

s E

xp

en

siv

e

(HM

L)

Pro

fita

ble

vs

un

pro

fita

ble

(RM

W)

Co

ns

erv

ati

ve

vs

Ag

gre

ss

ive

In

ve

stm

en

t

(CM

A)

Va

ria

nc

e e

xp

lain

ed

in

pe

rce

nt

(R s

qu

are

d)

Since 01.01.1999 32 0.02 0.05 -0.01 0.01 -0.02 45

Last 10 years 24 0.01 0.03 0.00 -0.02 -0.02 39

Last 5 years -1 0.01 0.03 0.02 0.00 -0.04 36

Source: Norges Bank Investment Management, Kenneth French. Bold indicates significance at 5 percent confidence level.

20/03/2019

Return and riskGOVERNMENT PENSION FUND GLOBAL