1 Government Pension Fund – Global Managing a Sovereign Wealth Fund 25 September 2007 Martin...

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Government Pension Fund – GlobalManaging a Sovereign Wealth Fund

25 September 2007

Martin SkanckeDirector General

Asset Management Department

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Norwegian Ministry of Finance

Large Sovereign Wealth Funds

Source: Peterson Institute for International Economics

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Topics

Macroeconomic roleGovernance and transparencySWFs in an international contextConclusions

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Wealth management – from theory to practice

• Stabilization: Spending must be separated from current (volatile) oil & gas income

• Savings: Fiscal policy must take account of transitory nature of revenues

t 0

Extraction Path

Consumption path after discovery

Time

Consumption path before petroleum discovery

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What can a fund do?

• A petroleum fund can support fiscal management if it: Enjoys wide political and public support Operates under clear rules Stores genuine savings

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What can a fund not do?

• A fund can never be a substitute for sound fiscal management Main priority must be to

design a good budget process which integrates oil revenue

develop a sustainable fiscal policy strategy build institutions that are competent, transparent

and accountable only THEN does it make sense to think about the role

of a fund

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The Norwegian petroleum fund model

• Fund is fully integrated with the state budget

a tool to strengthen the budget process

building on existing institutions

• Fund is only invested abroad in financial assets

protect domestic economy

risk diversification and maximize returns

financial investor

• A high degree of transparency

build public support for management of oil revenues

minimize risk of bad governance and corruption

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Return on investments

Fund Transfer to finance non-oil budget deficit

Revenues

Expenditures

State Budget

The Fund mechanism – integrated with fiscal policy

Fiscal policy guideline(over time spend real return of the fund,

estimated at 4%)

Petroleum revenues

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Benchmark for the Pension Fund – Global

Equities 60 % Fixed Income 40 %

America and Africa

35 %

Asia and Oceania

15 %

America and Africa

35 %

Europe

60 %

Asia and Oceania 5

%

Equity index:

FTSE All-Cap Index Approx. 7000 equities

Fixed income index:

Lehman Brothers Global Aggregate/Global Real Government / Agency / Corporate / Securitized Approx. 7500 bonds

Strategic benchmark

Europe

50 %

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Topics


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Pension Fund - Global Governance Structure

Ministry of Finance

Regulations

Performance reports

Norges Bank Investment Management / NBIM

Norwegian Parliament

Pension Fund Act

Performance reports and strategic changes reported in National Budgets and National Accounts

Legislator

Principal

Manager

Management agreement

Office of the Auditor General

Norges Bank AuditAdvisors

Advisory / consultancy agreement

Founded on Act, regulations and separate contracts

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Asset management: Clear lines of responsibilities

• Ministry of Finance – “Owner” overall responsibility strategic asset allocation (benchmark + risk limits) monitoring and evaluating operational management ethical guidelines reports to Parliament

• Central Bank – “Manager” implement investments strategy (benchmark) active management to achieve excess return risk control and reporting exercise the Fund’s ownership rights provide professional advice on investment strategy

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Ethical guidelines and corporate governance

Two main ethical obligations:

1) The obligation to ensure sound financial returns so that future generations will benefit from the petroleum wealth.

2) The obligation to respect fundamental rights for those who are affected by the companies in which the Fund invests.

• Exercise ownership rights – corporate governance

• Avoid investments in companies whose practices constitute an unacceptable risk that the Fund is or will be complicit in grossly unethical activities

Future work on ethical guidelines:• International seminar on ethics in investment management– January 2008• Evaluation process to be initiated in 2008, report presented to the Norwegian Parliament in

spring 2009

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Benefits of transparency

• Builds trust – necessary to achieve public support and legitimacy in managing sovereign wealth

• Disciplinary effect – pressure to deliver sound financial returns

• Contributes to stable international financial markets

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Topics


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SWFs’ growing role in international financial markets – selected aspects (1)

Well functioning financial markets are good for everyone:

Allow capital exporters to Decouple consumption and current revenues Improve risk/return ratio on savings

Allow capital importers to Decouple investments and domestic savings Improve productivity through productive

investments

A sensible management of oil-producing countries’ petroleum wealth in well functioning financial markets is in everyone’s interest

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Typical characteristics of SWFs are:

• Long investment horizon• No leverage• Absence of imminent claims for the withdrawal of funds

SWFs in general have strong risk-bearing capacity and may provide a stabilizing role – offsetting possible predominance of short-term investors

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• SWFs’ are large – potential market movers Lack of transparency may make SWFs less predictable

and even increase volatility in some situations Regulation and supervision?

• State controlled investment vehicles – suspicion of whether political objectives are guiding investment decisions May encourage financial protectionism, but equal

treatment of shareholders is a fundamental principle

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Topics


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Conclusions

• A well functioning international financial market is to everyone’s advantage

This should be the backdrop of any discussion on the role of SWFs

• SWFs may contribute to increased stability in financial markets

Long time-horizon No liabilities Little or no need for liquidity in the short term

• Transparency is key Builds trust and confidence – domestically and

internationally Has disciplinary effect on management

1 Government Pension Fund – Global Managing a Sovereign Wealth Fund 25 September 2007 Martin...

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