A Review of Norges Bank's Active Management of the Government Pension Fund Global

We have reviewed Norges Bank’s active management of the Government Pension Fund Global, referred to simply as the “Fund.” The absolute performance of the Fund is almost entirely determined by the benchmark choice set by the Ministry of Finance (the asset owner) and is dominated by equity risk. In this sense, the Fund can be viewed as a mega index fund. However, the Fund also deviates from its benchmark and pursues active management. These deviations stem from various investment strategies, such as factor investing, internal and external security selection, trading strategies based on opportunities arising from market imperfections and liquidity provisioning, and real estate investments. In this sense, the Fund can be viewed as akin to a mega index fund, enhanced by its active management. The relative performance of the Fund (i.e., the return difference between the Fund and its benchmark, also referred to as the active return) is 0.20% per year after costs. In terms of the Fund’s value added after costs, this corresponds to a transfer to the asset owner (and ultimately the Norwegian people) of NOK 30–50 billion over the 2013–2017 period, depending on how we adjust and credit risk taking. The lion’s share of the value added comes from the Fund’s equity portfolio. While it is difficult for us to assess each strategy’s contribution to the Fund’s total performance, a return decomposition suggests that the mean active return is due to security selection rather than market timing and, in particular, that the Fund has been able to choose outperforming external managers that contribute substantially. We also find that activities related to the indexing (e.g., asset positioning and securities lending) contribute to the total return, mitigating the Fund’s costs of passively managing the assets. In line with our mandate, the executive summary highlights the main findings and concludes with recommendations.