There was a negative return on the Government Pension Fund – Global in international currency of 23.3 per cent, equivalent to NOK 633 billion.

“We have made important changes in the implementation of the investment strategy. “We also increased our risk management capacity during the year,” says Yngve Slyngstad, Executive Director of Norges Bank Investment Management (NBIM).

The market value of the Government Pension Fund – Global was NOK 2 275 billion at the end of 2008, up from NOK 2 019 billion a year earlier. Inflows of new capital into the fund during the year were record-high at NOK 384 billion and were invested entirely in global equity markets.

These large purchases meant that the fund’s ownership in global equity markets climbed to 0.77 per cent at the end of the year, while its average ownership interest in European companies rose to 1.33 per cent. No less than 40 per cent of the equity portfolio at the end of the year was purchased during the course of 2008. The allocation to equities in the fund at the end of 2008 was 49.6 per cent.

The return on the fund was 3.4 percentage points weaker than that on the benchmark portfolio defined by the Ministry of Finance. The fund has generated an annual real return of 1.0 per cent since it was started up in 1998. Previous years’ excess returns relative to the benchmark portfolio were cancelled out in 2008 to leave a cumulative negative excess return of 0.04 percentage point. Fixed income management produced a negative excess return of 6.6 percentage points in 2008.

“We have reduced the absolute size of positions, especially on the fixed income side, to the extent possible,” says Slyngstad. “We have also made significant changes to the mandate structure, especially for external fixed income management.”

The fund has large holdings of bonds with limited liquidity in today’s market. Realised losses on the fixed income portfolio have been limited, however, and the portfolio is generating a high yield.

“The fund has a much longer investment horizon than the vast majority of investors,” says Slyngstad. “The key question is therefore how good today’s investments will prove in the long term.”