Investment strategy for the
Petroleum Fund
www.norges-bank.no
BiV/October 2002
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Source:
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Governor’s Staff
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Lecture at UiO
November 13, 2002
Br
iti
sh
Bn euro
Top 10 European Funds
160
140
120
100
80
60
40
20
0
The Norwegian Government Petroleum Fund has within a few years
become one of the largest funds in Europe
The inflow to the fund over the last 3 years has been appr.EUR 60 bn
BiV/October 2002
Outline
•
•
•
•
•
•
Background of the Fund
Portfolio models
Regional allocation
Equity portion
Active management
Ethical investments
BiV/October 2002
The petroleum sector and the
Norwegian economy (in 2001)
• Share of Norwegian export: 43,1 per cent
• Share of government revenue: 35,3 per cent
• Share of GDP: 21,6 per cent
• Share of employees: 1 per cent
BiV/October 2002
Background of the Fund
BiV/October 2002
The Petroleum Fund:
• The Norwegian Government Petroleum Fund was
established by law in 1990
• The inflow to the Fund is the the central government
budget surplus each year
• The first transfer occurred in May 1996
• The fund is invested in financial assets outside
Norway
BiV/October 2002
1
Transfers from the Government
Petroleum Revenue
The main purposes of the Petroleum
Fund:
State net cash flow from Petroleum
• A buffer for the government budget to shelter the domestic
economy from volatility in petroleum revenue
250.0
Transfers to the Petroleum Fund
Billion 2002 NOK
200.0
• An instrument for meeting the long-term challenges of a
combination of an expected decline in petroleum resource
revenue and an increase in government pension
expenditures
Financing budget defisits
150.0
100.0
50.0
0.0
1991
BiV/October 2002
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
BiV/October 2002
Net cash flow from the petroleum sector and
pension expenditures (per cent of GDP)
Pension expenditures
Growth of the Petroleum Fund
18
120
15
15
100
12
12
80
18
9
Net cash flow from the
petroleum sector
6
3
0
1970
1992
1980
1990
2000
2010
2020
2030
2040
9
6
60
3
40
0
20
2050
0
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
The Government Long Term Programme 2002-2005
The present value of future state pension expenses is USD
450 bn (by year end 2003)
Capital (Bill. USD)
Net budget surplus
The increase this year is USD 16 bn (in real terms)
BiV/October 2002
BiV/October 2002
Why is the Fund invested abroad?
Norway’s national wealth
Percentage distribution
• Budget concern
• The Petroleum Fund should not be a second budget
70
• The Fund does not affect international rates of return - better
returns abroad
60
50
• Monetary policy concern
40
• The petroleum activity yields substantial currency incomes
• Accumulation of foreign reserves in the Fund counteracts
appreciation of the currency
1997
2030
30
20
10
• The Fund as a buffer
0
• Drawing on a domestic fund could destabilize the economy when
activity is low
BiV/October 2002
79.676.6
80
• Investment concern
6.5
1.2
Oil and gas
0.6
6.6
13.315.6
Financial Fixed assets
assets
Human
capital
BiV/October 2002
2
The investment strategy could be divided into:
• Long-term (passive) investment strategy
– Strategic Asset Allocation (SAA)
– reflected in the benchmark
• Short-term (active) investment strategy
– deviation from the benchmark
– increase returns
– reduce costs
BiV/October 2002
Petroleum Fund - Division of responsibilities
• Owner: Ministry of
Finance
• Manager: Norges Bank
– Active investment strategy
– Achieve higher return than
benchmark given
investment mandate and
restrictions
– Risk control
– Reports to MOF
– Give advice to MOF on
Strategic Asset Allocation
– Passive investment strategy
– Strategic asset allocation and
investment universe
– Benchmarks
– Risk limits
– Evaluates manager (uses
consultant)
– Reports to the Parliament
BiV/October 2002
Strategic asset allocation depends on:
Strategic Asset Allocation in benchmark
• Purpose of the Fund
• “In terms of the Petroleum Fund, it is natural to apply a long
investment horizon and to recognize the importance of preserving the
Fund's international purchasing power". (Revised National Budget
1997)
Equities
40 %
Europe
50 %
• Owner’s risk tolerance
Developed markets
+
Brazil, Mexico, Tyrkey
Korea, Taiwan
• The expected return and risk of the various assets
classes
BiV/October 2002
America
42 %
Fixed income
60 %
Asia
8%
Europe
55 %
America
35 %
Asia
10 %
investment grade bonds
in developed markets
incl. emerging
market domiciled issuers
BiV/October 2002
Portfolio models
BiV/October 2002
BiV/October 2002
3
Market cap weighted bonds and
equity portfolios are time-varying!
70
70
60
50
US
40
30
Europe
30
Japan
20
jan.01
jan.99
jan.97
jan.95
jan.02
jan.99
jan.00
jan.01
jan.98
jan.93
jan.94
jan.95
jan.96
jan.97
jan.92
jan.88
jan.89
jan.90
jan.91
jan.86
jan.87
BiV/October 2002
Japan
0
0
bonds
Europe
10
10
Government
US
20
jan.91
bonds
50
40
jan.89
Non - govt.
jan.87
Equities
60
jan.85
estate
Government bonds
Stocks
Real
jan.93
A global market cap portfolio
BiV/October 2002
Portfolio models
Efficient front
Minimize:
• The portfolio choice is based on expected return,
variance (risk) and risk tolerance
n
n
σ p2 = ∑∑ wi w j ρ ijσ iσ j
i =1 j =1
Given:
• The efficient front and indifference curves are
based on subjective assessments
n
E ( R p ) = ∑ wi E ( Ri ) ,
i =1
n
∑w
• Portfolio choice is sensitive to changes in input
i =1
i
= 1,
Short-sale constraint:
• Investment horizon and availability of data
0 ≤ wi ≤ 1 , for all i
BiV/October 2002
BiV/October 2002
Risk preferences II
Return
Risk preferences I
Efficient frontier
It follows from this model that
the degree of risk aversion
determines the allocation between
risk free rate and market portfolio
(which has a fixed allocation
between bonds and stocks)
Asset allocation puzzle:
The degree of risk aversion should
determine the allocation between
bonds and stocks
Return
Risk
Risk
BiV/October 2002
BiV/October 2002
4
Efficie nt frontie r int'l stocks and bonds (local curr.),
with short sale s constraints.
Blue square s: e fficie nt frontie r 1986-2000.
Re d square s: indiv idual asse ts.
Ye llow triangle : Pe trofund.
Ye llow cirle : FX re se rv e s.
Ye llow cross: FX re s. 20% stocks
Efficient frontier
18
0.18
16
0.16
100% stocks
14
0.14
Annual expected return
1993-1997 1998-2002
15.46
-0.63
8.63
5.70
9.83
17.84
3.38
3.09
0.42
-0.38
Return stocks
Return bonds
Risk stocks
Risk bonds
Correlation
12
0.12
10
0.1
8
0.08
6
0.06
4
0.04
2
100% bonds
100% stocks
0
-2 0
0.02
0
0
0.05
0.1
0.15
0.2
2
4
6
8
10
12
14
16
18
20
0.25
1998-2002
Annual volatility
BiV/October 2002
1993-1997
BiV/October 2002
Relationship between return differentials and
exchange rate changes in bond markets in the US,
Japan and Europe
Regional allocation
US and Japanese bonds
US and European bonds
Exchange rate changesand return on American and Japanese bonds
Exchange rate changes and return on American and European bonds
200
250
200
150
150
100
100
BiV/October 2002
Exchange rate index (USD/EUR)
Relative return index (USD/JPY)
jan.02
jan.01
jan.00
jan.99
jan.98
jan.97
jan.96
jan.95
jan.94
jan.93
jan.92
jan.91
jan.90
jan.89
jan.88
jan.87
jan.02
jan.01
jan.00
jan.99
jan.98
jan.97
jan.96
jan.95
jan.94
jan.93
jan.92
jan.91
jan.90
jan.89
jan.88
jan.87
jan.86
Exchange rate index (USD/JPY)
jan.86
50
50
Relative return index (USD/EUR)
BiV/October 2002
Correlation coefficients for selected countries in the
Fund's bond portfolio (in local currency) in the period
1994-2001. The colour code for the correlation coefficients
is: Red: 0.75-1, Pink: 0.50-0.74, Green: 0.25-0.49, Blue: <
0.24
Relationship between return differentials and
exchange rate changes in equity markets in the
US, Japan and Europe
US and Japanese equities
US and European equities
Exchange rate changes and return on American and Japanese stocks
Exchange rate changes and return on American and European stocks
US
Canada
1 0.77
0.77
1
0.23 0.68
0.22 0.77
0.65
0.65
0.77 0.79 0.77
0.69 0.70 0.69
0.78 0.69
0.70 0.69
Japan
Australia
NewZealand
0.23 0.22
0.68 0.77
0.65 0.65
1 0.26
0.26
1
0.31 0.72
0.31
0.72
1
0.14 0.11 0.14
0.58 0.57 0.58
0.71 0.70 0.71
0.15 -0.13
0.60 0.54
0.72 0.60
Netherlands
Italy
France
Germany
UK
0.77
0.79
0.77
0.78
0.69
0.14
0.11
0.14
0.15
0.71
0.70
0.71
0.72
0.60
1
0.99
1.00
1.00
0.81
1.00
0.99
1.00
1
0.81
200
800
700
600
150
500
400
300
100
200
100
Relative return index (USD/JPY)
Exchange rate index (USD/EUR)
Relative return index (USD/EUR)
jan.02
jan.01
jan.00
jan.99
jan.98
jan.97
jan.96
jan.95
jan.94
jan.93
jan.92
jan.91
jan.90
jan.89
jan.88
jan.87
jan.02
jan.01
jan.00
jan.99
jan.98
jan.97
jan.96
jan.95
jan.94
jan.93
jan.92
jan.91
jan.90
jan.89
jan.88
jan.87
jan.86
Exchange rate index (USD/JPY)
jan.86
50
0
0.69
0.70
0.69
0.70
0.69
US Can
BiV/October 2002
0.58
0.57
0.58
0.60
-0.13 0.54
Jap Aust NewZ
0.99
1
0.99
0.99
0.81
1.00
0.99
1
1.00
0.81
Neth Ital Fran Germ
0.81
0.81
0.81
0.81
1
UK
BiV/October 2002
5
Correlation coefficients for selected countries in the
Fund's equity portfolio (in local currency) in the period
1994-2001. The colour code for the correlation coefficients
is: Red: 0.75-1, Pink: 0.50-0.74, Green: 0.25-0.49, Blue: <
0.24.
US
Canada
Mexico
Brasil
1 0.77 0.54 0.56
0.77
1 0.61 0.58
0.54 0.61
1 0.57
0.56 0.58 0.57
1
0.49
0.40
0.39
0.54
0.37
0.37
0.41
0.32
0.48
0.40
0.36
0.30
0.62
0.62
0.54
0.45
0.62
0.62
0.55
0.51
0.57
0.52
0.51
0.60
0.57
0.55
0.40
0.51
0.73
0.67
0.50
0.55
0.52
0.52
0.34
0.50
0.71
0.71
0.49
0.62
0.73
0.68
0.44
0.60
0.79
0.70
0.56
0.59
Japan
Taiwan
Korea
HongKong
Singapore
Australia
NewZealand
0.49
0.37
0.48
0.62
0.62
0.57
0.57
0.40
0.37
0.40
0.62
0.62
0.52
0.55
0.39
0.41
0.36
0.54
0.55
0.51
0.40
0.54
0.32
0.30
0.45
0.51
0.60
0.51
1
0.32
0.40
0.33
0.38
0.44
0.31
0.32
1
0.46
0.38
0.38
0.31
0.33
0.40
0.46
1
0.52
0.50
0.41
0.45
0.33
0.38
0.52
1
0.81
0.63
0.48
0.38
0.38
0.50
0.81
1
0.58
0.55
0.44
0.31
0.41
0.63
0.58
1
0.57
0.31
0.33
0.45
0.48
0.55
0.57
1
0.50
0.33
0.36
0.50
0.55
0.59
0.55
0.35
0.32
0.29
0.22
0.33
0.44
0.44
0.47
0.34
0.39
0.43
0.51
0.48
0.52
0.48
0.40
0.35
0.49
0.51
0.55
0.53
0.44
0.34
0.56
0.58
0.59
0.66
0.62
Netherlands
Italy
France
Germany
UK
0.73
0.52
0.71
0.73
0.79
0.67
0.52
0.71
0.68
0.70
0.50
0.34
0.49
0.44
0.56
0.55
0.50
0.62
0.60
0.59
0.50
0.35
0.47
0.48
0.44
0.33
0.32
0.34
0.40
0.34
0.36
0.29
0.39
0.35
0.56
0.50
0.22
0.43
0.49
0.58
0.55
0.33
0.51
0.51
0.59
0.59
0.44
0.48
0.55
0.66
0.55
0.44
0.52
0.53
0.62
1
0.68
0.84
0.84
0.80
0.68
1
0.75
0.70
0.59
0.84
0.75
1
0.84
0.76
0.84
0.70
0.84
1
0.71
0.80
0.59
0.76
0.71
1
US
Can Mex Bra
Jap Taiw Kor HK
Sing Aust NewZ
Neth Ital
Decomposition of the variance of the return on
equity and bond investments in the US, Japan and
Europe. Monthly data for the period 1986-2001
70
Correlation between
exchange rate
changes and return on
stocks and bonds
respec tively
60
50
40
30
Variance of exchange
rate changes
20
10
0
Variance of return on
stocks and bonds
respec tively
-10
-20
US
Japan Europe
US
Japan Europe
Fran Germ UK
BiV/October 2002
BiV/October 2002
Regional portfolio weights
Correlation between regions
Market capitalisation weights are attractive
Correlations between bond markets
(measured in local currency, 60 month window)
Correlations between stock markets
(measured in local currency, 60 month window)
0.8
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
•
•
•
•
exposed against “bubbles” in market pricing
are not related to our trading pattern (import weights)
is affected by difference in structure of capital markets between countries
implies growing weight of bond investments in countries facing a rising
debt burden (in relative terms)
• does not take other parts of our national wealth into consideration
jan.01
jan.00
jan.99
BiV/October 2002
consistent with theory (CAPM)
an indicator of production capacity
simplifies benchmarking vs. index and peer’s
no rebalancing is needed
connections to liquidity - important for a large fund with capital flows
but should be modified:
Japan,Europe
jan.91
jan.01
jan.00
jan.99
jan.98
jan.97
jan.96
jan.95
jan.94
jan.93
jan.92
0
US,Europe
jan.98
0.1
US,Japan
jan.97
Japan,Europe
0.2
jan.96
US,Europe
0.3
jan.95
US,Japan
0.4
jan.94
0.5
jan.93
0.6
jan.92
0.7
jan.91
•
•
•
•
•
BiV/October 2002
What is most important for the
performance - sector or region
X SL = α + β 1 X GS + β 2 X L + ε
Japan
US
6
12
5
10
3
sector
country
2
6
sector
country
4
2
1
0
0
1994-1 997
1994-1997
1998 -2001
Euro-block
1998-2001
UK
7
6
6
5
5
4
4
sector
3
country
2
3
sec tor
country
2
1
1
0
0
1994-1997
BiV/October 2002
Equity portion
8
4
1998-2001
1994-1997
1998-2001
BiV/October 2002
6
CAPM
Determinig the equity portion
• What is the return on equity investment (the equity
premium puzzle)
• How should we assess the risk associated with
equity investment
• Is the optimal equity portion independent of the
investment horizon?
E(Ri ) = RF + βi ⋅ [E(Rm ) − RF ]
where:
RF - riskfree rate
E(Rm ) - expected return on market portfolio
βi =
BiV/October 2002
cov(Ri , Rm ) σ im
= 2 - systematic risk on asset ”i”
var(Rm )
σm
BiV/October 2002
How should we calculate average return?
Consumption - CAPM
(an example using US data for the period 1926-2000)
E ( Rm ) − R f = γσ (∆c)σ ( Rm ) ρ (∆c, Rm ),
γ - degree of risk aversion
ρ - correlation coefficient (between consumption
growth and asset return
R f - riskfree rate
Arithmetic
Geometric
Continuesly
compounding
Aksjer Obligasjoner Aksjepremie
12.97
5.46
7.51
11.03
5.31
5.72
10.46
5.18
5.28
RA = RG + 1/2 σA2
∆c - consumption growth
BiV/October 2002
BiV/October 2002
Rolling fixed window (10 years)
Return on US bonds and stocks,
1926-2002
25
60
20
40
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
-5
2001
1996
1991
1986
1981
1976
1971
1966
1961
1956
1951
-40
-60
-10
BiV/October 2002
1946
Kontinuerlig (ln) snitt
0
0
-20
1941
Realavkastning
5
20
1936
Arit gj snitt
1931
Geo gj snitt
10
1926
15
Obligasjoner
Aksjer
BiV/October 2002
7
Rolling fixed window (3, 5 and 10 years)
40
30
Equity premium in 9 countries
1900 - 2002 (average annual return)
30 %
20
20 %
10
10 %
2000
0%
-30
-20 %
-40
-30 %
10 år
5 år
3 år
Japan
Sveits
Frankrike
Nederl.
Italia
UK
Tyskland
-20
1900-2000
Canada
-10 %
USA
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
-10
1930
0
1995-1999
2000-2002
-40 %
BiV/October 2002
BiV/October 2002
Standard deviation
Correlation between bonds and equities
Rolling fixed window (10 years)
rolling fixed window (5 and 10 years)
40
Standardavviket til aksjer
Standardavviket til obligasjoner
Gj snitt (1926-2002)
Gj snitt (1926-2002)
BiV/October 2002
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
2000
1995
1990
1985
1980
1975
1970
1965
-0.4
1950
0
1945
-0.2
1940
0
5
1960
0.2
10
1955
0.4
15
1950
0.6
20
1945
25
1940
0.8
1935
Prosent
30
1935
1
35
10 år
5 år
-0.6
-0.8
-1
BiV/October 2002
Dividend discount model (DDM):
CFt
B0 = ∑
t
t =1 (1 + y )
How to use the DDM
T
~
∞

CFt
,
P0 = E ∑
 t =1 (1 + y + rp) t 


Assume constant growth rate (g) in dividend (D):
∞
P0 = ∑
t =1
D0 (1 + g ) t
D0
=
.
y + rp − g
(1 + y + rp ) t
y + rp =
BiV/October 2002
• Y, D and P is observable
• rp, g and Pfair are unobservable
• Q1: What should dividend (and
earnings) growth be to justify
current pricing?
• Q2: For given g, what rp is
implied in current pricing?
• Q3: For given g and rp, what is
fair price?
D
+g
P
g = y + rp −
rp =
P fair
D
P
D
+g− y
P
D
=
y + rp − g
BiV/October 2002
8
Dividend/Price ratios in USA, Japan, Europe and UK, 1973 - 2002
USA
Japan
3.50
10
01
/0
0 8 1 /7
-2 3
0 4 6- 7
-1 4
9
12 - 76
/1
06 2 /7
/ 7
0 3 08 /7
-3 9
1 1 0- 8
-2 1
0 7 2-8
-1 2
10 6-8
/0 4
02 3 /8
/1 6
06 1/
-2 8 7
02 6-8
-1 9
12 8- 9
/1 1
06 0 /9
/0 2
0 1 6 /9
-2 4
0 9 9- 9
-2 6
0 5 2- 9
-1 7
08 7-9
/0 9
1 /0
1
-2 st avvik
+2 st avvik
dy
+2 st avvik
BiV/October 2002
2000
dy
1998
0.00
-2 st avvik
1996
2.00
0.00
1995
1.00
01/01/73
05/04/76
09/07/79
11/10/82
03/12/90
07/03/94
09/06/97
11/09/00
08-19-74
11-21-77
02-23-81
05-28-84
01-13-86
08-31-87
04-17-89
07-20-92
10-23-95
01-25-99
04-29-02
100
1993
2.00
4.00
1991
6.00
198 9
8.00
1987
3.00
1985
dy
4.00
1984
10.00
5.00
1982
12.00
6.00
1980
14.00
7.00
1978
8.00
1000
1976
+2 st avvik
1974
dy
UK
197 3
-2 st avvik
1971
01
/0
09 1 /7
-1 3
05 6-7
-3 4
02 1- 7
-1 6
10 3- 7
-2 8
07 9-1 79
03 3-8
-2 1
10 8-8
/ 3
08 12/
-2 84
09 5-8
/0 6
01 5/
-2 88
07 2-9
/1 0
06 0/
-2 91
06 1-9
/0 3
11 3 /9
-1 5
03 8-9
/0 6
04 8 /9
-1 8
12 7-0
-3 0
101
+2 st avvik
1969
dy
Europe
1951
-2 st avvik
1967
-0.50
1965
0.00
Vekst i no minelt GDP og nom inelt EPS i SP500
1 0000
1963
0.00
1962
1.00
– Current D/P
ratios in the
different
regions are
on of several
indicators
supporting a
positive, but
low equity
premium
going
forward
1960
0.50
1958
1.00
2.00
195 6
1.50
3.00
1954
2.00
4.00
1952
3.00
2.50
5.00
dy
7.00
6.00
08
/0
0 2 1 /7
/0 3
04 9 /7
-2 4
12 6- 7
-1 6
08 9- 7
-1 7
0 6 3 -7
/0 9
11 4/ 8
-2 1
07 9 -8
-2 2
03 3-8
-1 4
0 9 7-8
/1 6
0 3 1 /8
/0 7
02 7 /8
-2 9
10 5- 9
-1 1
06 9- 9
-1 2
3
0 5 -9
/ 4
09 0 2/
-2 96
05 9 -9
-2 7
01 4 -9
-1 9
501
dy
8.00
dy
Relationship between earnings growth and
GDP-growth (log scale)
BiV/October 2002
Three reasons for falling equity prices:
• Increased interest rates (y)
• Increased risk premium
(rp)
• Lower dividend (and
earnings) growth (g)
D
P =
y + rp − g
Return stocks
Return bonds
Risk stocks
Risk bonds
Correlation
Efficient frontier
1988-1997 1993-2002
12.71
7.69
8.47
7.21
11.70
14.40
3.30
3.26
0.50
-0.04
14
13
100% stocks
12
11
10
9
100% bonds
100% bonds
8
100% stocks
7
• Could also be that a bubble
has burst
6
0
2
4
6
8
1988-1997
BiV/October 2002
1993-1997 1998-2002
15.46
-0.63
8.63
5.70
9.83
17.84
3.38
3.09
0.42
-0.38
Return stocks
Return bonds
Risk stocks
Risk bonds
Correlation
18
16
100% stocks
14
12
10
6
100% bonds
4
2
0
-2 0
100% stocks
2
4
6
8
10
1998-2002
BiV/October 2002
12
14
16
1993-2002
BiV/October 2002
Efficient frontier
8
10
12
14
16
18
Equity portion and investment
horizon
• Merton/Samuelsen
• Random walk
• Constant relative risk
aversion
• Mean reversion
• Long horizon - more
flexibility in labour supply
• Shortfall preferences
• Equity portion
independent of investment
horizon
• Equity portion depends on
investment horizon
20
1993-1997
BiV/October 2002
9
Portfolio risk
Siegel (1998): US data from 1802 to 1997
USA 1926 - 2000
• Mean reverting
equity returns implies
that equity
investments are less
risky at long
investments horizons
25
50
45
40
35
30
25
20
15
10
5
0
20
15
10
5
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
1 year (left axe)
Investment
1 år 5 år 10 år 30 år
horizon
Equity portion 7% 25% 40.6% 71.3%
that minimize
risk
5 year (right axe)
BiV/October 2002
BiV/October 2002
Equities and long-term risk
Time-varying equity allocation
(market timing)?
• “We have a sample of 24 markets for which we have data
in 1931. Out of these, only seven experienced no
interruption (the US, Canada, the UK, Australia, New
Zealand, Sweden and Switzerland). Seven experienced a
temporary suspension of trading, less than a year. The ten
remaining markets suffered a long-term closure.”
13
12
11
10
9
8
7
•
Jorion and Goetzmann (1998)
6
5
2002
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
1946
1942
1938
1934
1930
1926
4
Return index for US equity (ln)
Linear (Return index for US equity (ln))
BiV/October 2002
BiV/October 2002
The benchmark is the starting point
for the operative management
Active management
• The benchmark is defined by the Ministry of
Finance
• Norges Bank has ambition to outperform the
benchmark within the risk limits set by MoF
• To main alternatives:
• index management
• active management
BiV/October 2002
BiV/October 2002
10
Index management
135
130
Benchmark
Index management
125
• Low cost and low
risk
120
115
110
105
100
1.k
va
rta
l1
99
2.k
7
va
rta
l1
99
3.k
7
va
rta
l1
99
4.k
7
va
rta
l1
99
1.k
7
va
rta
l1
99
2.k
8
va
rta
l1
99
3.k
8
va
rta
l1
99
4.k
8
va
rta
l1
99
1.k
8
va
rta
l1
99
2.k
9
va
rta
l1
99
3.k
9
va
rta
l1
99
4.k
9
va
rta
l1
9
1.k
99
va
rta
l2
00
2.k
0
va
rta
l2
00
0
• Among large international pension funds there is a
tendency towards using index management for a large
share of the equity portfolio
• Index management is a “standard product”
• Competitive gains seem to be achieved with an increase in
the volume under management (economies of scale)
• Management costs are very low
Index management
BiV/October 2002
BiV/October 2002
Active management can be carried out
in four different ways:
BiV/October 2002
140
Benchmark
135
Index management
130
Active management
125
120
115
110
105
100
• Not many
managers beat the
benchmarks
consistently over
time
• Risk must be
controlled
1.k
va
r ta
l1
99
2.k
7
va
r ta
l1
99
3.k
7
va
r ta
l1
99
4.k
7
va
r ta
l1
99
1.k
7
va
r ta
l1
99
2.k
8
va
r ta
l1
99
3.k
8
va
r ta
l1
99
4.k
8
va
r ta
l1
99
1.k
8
va
r ta
l1
99
2.k
9
va
r ta
l1
99
3.k
9
va
r ta
l1
99
4.k
9
va
r ta
l1
99
1.k
9
va
r ta
l2
00
2.k
0
va
r ta
l2
00
0
• by changing the country allocation
• by changing the equity portion
• within the equity portfolio: by increasing
investments in sectors or companies that are
expected to perform better than others
• within the bond portfolio: by changing interestrate risk or credit risk.
Active management
BiV/October 2002
Example: Large US pension funds
Risk-adjusted return:
• Fama and French (1993) three-factor model:
– broad stock index
– excess return on a portfolio of small stocks over a
portfolio of large stocks
– excess return on a portfolio of high book-to-market
stocks over a portfolio of low book-to-markets stocks
• Carhart (1997) augmented this model to include:
– a portfolio of stocks with high return over the past
months
BiV/October 2002
BiV/October 2002
11
Considerable debate about the
interpretation of this results
• Entirely spurious and the result of data-snooping
• Inability of the the broad stock index to proxy for
the market portfolio return
• Genuine evidence against CAPM, but not against
a broader model in which there are multiple risk
factors
• Mistakes that disappear once market participants
become aware of them
• Enduring psychological biases that lead investors
to make irrational forecasts
Ethical investments
BiV/October 2002
BiV/October 2002
What are ethical guidelines?
Three options for the Petroleum Fund
•
“The reason we have the phenomenon of social investing is that people are
concerned about such issues as human rights abuses, environmental
degradation and exploitation of workers - and they have taken the fight against
these social ills into the business arena.” (The Journal of Investing, Winter
1997)
• Option 1: Screening
•
“Social investors may be individuals, businesses, universities, hospitals,
pension funds, religious institutions and other non-profit organisations.”
(Social Investment Forum, 1997 Report)
• Option 2: Invest in ethical equity fund
•
A broad set of criteria are currently used to define ethical guidelines: In the
US, the most important criteria are: tobacco (84%), gambling (72%), firearms
(69%), alcohol (68%), birth control (50%), environment (37%), workers’
rights (25%), human rights (23%), animal rights (7%).
• Option 3: Influence enterprises through use of
voting rights
• positive screening ("best-in-class" approach)
• negative screening (black-listing of enterprises/industries)
BiV/October 2002
BiV/October 2002
Ulike paradigmer når det gjelder SRI:
Resultatene for miljøporteføljen så langt:
• Lavere avkastning i
miljøporteføljen enn i
Petroleumsfondets
aksjeportefølje
Det er SRI-effekter i
aksjemarkedene:
SRI-selskaper gir
høyere avkastning
og lavere risiko
enn andre selskaper
SRItilhengere
110
100
90
80
BiV/October 2002
70
Effisiente
markeder
60
50
jul.02
sep.02
mai.02
jan.02
mar.02
nov.01
jul.01
Miljøporteføljen
sep.01
mai.01
jan.01
40
mar.01
• Lite sannsynlig at dette
skyldes miljøkriteriene
fordi miljøporteføljen har
en klar land- og
sektorskjevhet i forhold
fondets aksjeportefølje
SRI-avkastning
mist like god,
sannsynligvis bedre
Det er ingen SRI-effekter i
aksjemarkedene:
SRI-screening reduserer
diversifikasjonsmulighetene
SRImotstandere
Ineffisiente
markeder
(feilprisinger
er mulig)
Petroleumsfondets aksjeportefølje
SRI-avkastning:
kanskje like god,
sannsynligvis dårligere
Det er feilprisinger i
aksjemarkedene, men det
er bare aktiv forvaltning ut
fra finansielle vurderinger
som lønner seg
BiV/October 2002
12
Hva bestemmer bedriftenes inntjening?
Ansattes
motivasjon
Offentlige
reguleringer
Bedriftens
kostnader
Bedriftens
strategi
Bedriftens
inntekter
Kundene
Website: www.norges-bank.no
Investorer
Bedriftens
finansieringskostnader
Bedriftens inntjening
og aksjekurs
BiV/October 2002
BiV/October 2002
13