Return and risk GOVERNMENT PENSION FUND GLOBAL Press seminar Oslo, - PowerPoint PPT Presentation

Return and risk GOVERNMENT PENSION FUND GLOBAL Press seminar Oslo, 20 March 2019 20/03/2019

1 INVESTMENTS 1.1 Investments _______________ 8 1.2 Reference index ___________ 16 1.3 Reference portfolio _________ 24 2 RETURN 2.1 Return ___________________ 36 2.2 Relative return _____________ 44 2.3 Return and costs ____________56 3 RISK 3.1 Risk _____________________ 62 3.2 Relative risk _______________ 70 3.3 Risk adjustments ___________ 76 APPENDIX Factor and risk-adjusted return

Investments 3

Management of the fund Investments Market Market index Ministry of Finance Reference index Reference portfolio Norges Bank Investment Management Actual portfolio Source: Ang et al (2014). Norges Bank Investment Management 4

Equity benchmark vs FTSE Global All Cap index Investments. Table 8. By country. Billions of kroner 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 Absolute Deviation 0 0 -500 -500 -1,000 -1,000 UK Germany France Switzerland Netherlands Czech Republic Malaysia Norway Canada US 5

Fixed-income benchmark vs the BBGA index Investments. Table 10. By currency. Billions of kroner 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 Absolute Deviation 0 0 -200 -200 -400 -400 Euro Mexican Peso Swiss Franc South Korean Won Canadian Dollar Chilean Peso Norwegian Krone Indonesian Rupiah US Dollar Japanese Yen 6

Reference portfolio adjustments - equities Investments. Charts 5 and 7. Percent of fund Adjustments due to universe expansion Adjustments due to systematic factors in the reference portfolio for equities. in the reference portfolio for equities. Over-weighted stocks Over-weighted stocks 5 5 5 5 4 4 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 7

Reference portfolio adjustments - fixed income Investments. Charts 6 and 8. Percent of fund Adjustments due to universe expansion Adjustments due to the fiscal strength factor in the reference portfolio for fixed income. in the reference portfolio for fixed income. Over-weighted bonds Under-weighted bonds 5 5 5 5 4 4 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 8

Contribution to relative return in 2018 Investments. Table 14. Percentage points 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 9

Contribution to relative return 2013-2018 Investments. Table 15. Annualised. Percentage points 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 10

Return 11

Absolute return - key figures Return. Table 18. Annualised. Percent Since Last Last 2018 01.01.1998 10 years 5 years Return on equity investments 1 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 investments 2 - - 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. 12

Absolute return - 5-year buckets Return. Table 19. Annualised. Percent 1998-2002 2003-2007 2008-2012 2013-2017 Return on equity investments 1 -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 investments 2 - - - 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. 13

Contribution Cont ributions to r s to rela elativ tive r e retu eturn 20 n 2018 18 Return. Table 32. Percentage points Equity Fixed-income Real estate Allocation Total management management management 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 14

Contribution Cont ributions to r s to rela elativ tive r e retu eturn 20 n 2013 13 - 2018 2018 Return. Table 33. Annualised. Percentage points Equity Fixed-income Real estate Allocation Total management management management 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 15

Relative return after management costs Return. Table 36. Annualised. Basis points 5 years Since inception The fund's relative return before management 3 25 costs The fund's management costs 1 -5 -8 The fund's relative return after -2 16 management costs 1 The fund’s management costs is excluding costs related to unlisted real estate prior to 2017. 16

Estimated relative return of a passive strategy Return. Table 37. Annualised. Basis points 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 -2 -4 benchmark index Transaction costs related to inflows and -1 -5 extraordinary benchmark changes 0 -7 Estimated relative return of a passive strategy 17

Estimated relative return difference Return. Table 38. Annualised. Basis points 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 18

Risk 19

Equity exposure Risk. Chart 21. Percent 70 70 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 20

Rolling return of 70 equity/30 fixed income Risk. Chart 19. 5-year rolling return. Annualised. Measured in dollars. Percent 30 30 25 25 20 20 15 15 Equity contribution 10 10 70 equity/30 fixed income 5 5 0 0 -5 -5 -10 -10 1900 1920 1940 1960 1980 2000 Source: Dimson-Marsh-Staunton Global Return Data 21

The fund’s expected absolute volatility Risk. Chart 29. Percent 30 30 25 25 20 20 15 15 10 10 5 5 0 0 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Norges Bank Investment Management 22

Expected Expec ted rela elativ tive v e vola olatili tility ty Risk. Table 41. All numbers measured at fund level. Basis points Equity Fixed-income Real estate Allocation Total management management management Fund allocation 11 9 26 5 30 Reference portfolio 9 9 12 of which systematic factors 7 7 5 3 0 5 8 Allocations 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 3 3 Systematic factors Total 20 9 26 5 33 23

36-month correlation Risk. Chart 25. 10-year US yield changes vs. S&P 500 price returns 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 -1.0 -1.0 75 80 85 90 95 00 05 10 15 Source: Bloomberg 24

Recent and past stressed years Risk. Chart 22. Asset class returns. Measured in dollars. Percent 30 30 20 20 10 10 Equity 0 0 Fixed income -10 -10 -20 -20 -30 -30 -40 -40 -50 -50 1920 1931 2002 2008 Source: Dimson-Marsh-Staunton Global Return Data 25

Fund performance in 2008 Risk. Chart 23. Percent 40 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 Fund, Fund, Fund, NOK/USD NOK/Currency USD Currency basket NOK basket 26

MSCI World industry worst losses Risk. Chart 28. 12-month and 60-month rolling basis.1970:1 – 2018:12. Percent 70 70 60 60 50 50 40 40 12 months 30 30 60 months 20 20 10 10 0 0 Consumer Industrials Health Care Utilities Energy Materials Consumer Discretionary Financials Communication Services Information Technology Staples Source: MSCI 27