INVESTMENT STRATEGYNBIM CEO YNGVE SLYNGSTAD

OSLO, 17 DECEMBER 2015

Questions

2

How much should the fund invest in real estate?

Should the fund invest in unlisted infrastructure?

Is there a need to adjust the management framework?

1

2

3

Supporting analyses

3

Our “Peers”

4Source: based on latest annual/quarterly reports, NBIM calculations

GPFG

GICNZ Super

APG

CPPIB

OMERS

CalPERS

Equities

Fixed income

Real Estate

Infrastructure

Private Equity

Other

How much should the fund invest in real estate?

5

1

6

1

MoF gives

mandate to

invest up to

5% in real

estate

2015

London

20142011 2012 20132006 2010

Paris

Berlin New York

Boston

Washington DC

Munich

San Francisco

Norges Bank

recommends

MoF to include

real estate in

the fund

Tokyo and

Singapore

announced as

strategic

markets

Logistics

7

1

More than NOK 200 bn in real estate

2011 2012 2013 2014 2015

Unlisted real estate Listed real estate

11

25

52

141

208

Billion kroner

Source: NBIM

8

1

123 HOLDING COMPANIES

849 PROPERTIES

2,100 TENANTS

14m SQM LOGISTICS

3m SQM OFFICE/RETAIL

13 COUNTRIES

9

1

GPFG real estate returnsMeasured in fund currency basket

5.8%

11.8%

10.4%

8.3%

Source: NBIM

10

1

Real estate returnsMeasured in fund currency basket

Source: NBIM, FTSE, Barclays and IPD

*The IPD global index is released annually. The latest numbers available are the return figures for 2014.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2012 2013 2014 Sep. 2015

GPFG real estate IPD GLOBAL INDEX* 60/40 (Equity/Fixed income)

11

1

Real estate costsOne-off transaction costs not included

Source: NBIM

bps

12

Diversification

Reflect universeInflation hedge

Deliver cash flowReal estate factor

Absolute returnIlliquidity premium

1

13

1

-2

-1

0

1

2

3

4

5

6

7

-2

-1

0

1

2

3

4

5

6

7

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

UK prime office yield UK 10Y inflation-linked bonds yields

% %

There is no clear link

Source: CBRE, BoE

Real estate yields and interest rates

14

1

Confirm that real estate returns follow different pattern, but vary over time

Source: NCREIF, Bloomberg. S&P 500 used as equity index and Barclays 10y government bond index used as bond index.

Private RE calculated using NCREIF, desmoothed to fit autocorrelation of US REITs.

Correlation with equities and bonds

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

1978-1987 1987-1996 1996-2005 2005-2014

Private RE-Equities (US) Private RE-Bonds (US)

15

1

Factors driving real estate returns

* Principal components extraction with orthogonal varimax rotation,

based on 1978-2014 quarterly returns. US data.

Factor loadings F1 F2 F3

Bonds -0.1 0.0 -0.4

Equities0.1 0.6 0.3

Private real estate

(de-smoothed) 0.8 0.2 0.1

Economic factors GDP growth

Industrial output

Consumption

Financial factors Interest rates

Inflation

Term structure

Structural factors Supply and demand

Market constraints

Market leverage

Liquidity

Statistical factors*

16

1

Global trends influencing real estate

GLOBALISATION

TECHNOLOGY

SUSTAINABILITY

DEMOGRAPHY

URBANISATION

E-commerce. Smart buildings

Global cities and supply chains. Retail “show-windows”

Lower costs. Higher demand. Properties for the future

Population and middle class growth. Age increase

Global trend, but highest effect for Asia and emerging markets

17

1

Real estate asset class size

Sources: DTZ Money Into Property (2014), FTSE Global All Cap, Barclays Global Aggregate Bond Index (2015), Oxford Economics (2015)

42%($ 41.6 tn.)

44%($ 43.0 tn.)

14%($ 13.6 tn.)

Equity marketBond market Invested real estate market

18

1

Academic research results

Source: Seiler et al. (1999) and NBIM own research

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Rehring (2012)MacKinnon & Zaman (2009)

Lee & Stevenson (2006)Feldman (2003)

Cheng (2001)Sing & Ong (2000)

Chua (1999)Ziobrowski et al. (1999)

Boyd et al. (1998)Ziobrowski et al. (1997)

Liang et al. (1996)Kallberg et al. (1996)

Giliberto (1992)Firstenberg et al. (1988)

Webb et al. (1988)Irvin & Landa (1987)

Webb & Rubens (1987)Brinson et al. (1986)

Gold (1986)Hartzell (1986)

Webb & Rubens (1986)Cooperman et al. (1984)

Folger (1984)

19

1

Investor target allocation to real estate

Source: Cornell University (2013)

* Including Sovereign Wealth Funds

0% 2% 4% 6% 8% 10% 12%

Commercial Banks & Other

Endowments & Foundations

Private Pensions

Insurance Companies

Public Pensions

Government Entities*

20

How much should the fund invest in real estate?

10 percent defined as a range of +/- 5 percent around target

1

21

Infrastructure investments

A heterogonous set of

investment

opportunities

Secure long-term

purchasing power of

the fund

A wide range of

opportunities available

– total portfolio

approach warranted

2

WHAT?

WHY?

HOW?

2

Distinguishing features

22

Provisions of key public services

Economies of scale

Long project life-cycle

Limited competition

– Natural monopolies

– Regulated assets

– Government concessions

2

Infrastructure investments

23

Long-term investments that could provide attractive attributes

YieldDiversification Stability InflationDuration

Existing

assets

generate free

cash flow

Cash-flow

often

regulated in

long-term

contracts

Cash-flows

often

adjusted for

inflation

Essential

service

High barriers

to entry

Less

exposed to

business

cycles

Relatively low

correlation

with other

assets

2

A heterogeneous set of investment

opportunities

24Source: First State Investments and NBIM. For illustration purposes only.

8

10

12

14

16

18

20

Low Medium High

Public Private

Partnerships

Regulated

Assets

Operating

Toll Roads

Airports,

Ports, Rail

Greenfield

Toll Roads

• Social

infrastructure and

availability of

transport projects

• Key feature is the

absence of

demand risk

• Revenues and

returns often

correlated to

inflation

• Mature toll roads

with known traffic

history

• Mature assets operating under

strict regulatory regimes

• Limited demand risk due to

monopolistic position

• Revenues inflation linked

• Mature transport

assets subject to

demand risk

• Returns often

correlated to GDP

• Greenfield toll

roads with high

traffic forecast risk

• Broadcast transmission,

wireless infrastructure,

emergency communication

systems – technology and

demand risks

Retu

rn, p

er

ce

nt

Risk

2

Communication

The opportunity set is global

25

Substantial funding needs going forward

Source: Blackrock, data sourced from Dealogic as of December 31 2014

North America

Renewables

Transport

Asia & Australia

Privatisations

APAC – growth opportunities

Western Europe

Renewables

Power transmission

Utility deleveraging

South America

Reform agenda

in Mexico, Columbia, Chile

18

32

65

30

916

21

26

2

30

5

8

11

23

14

34

1020

36

26

5

11

2

Energy

Power

Renewables

Social

Transport

Other

2

The opportunity set may increase

26

Substantial funding needs going forward

0

10

20

30

40

50

60

70

Roads Rail Ports Airports Power Water Telecom Total

12.2

11.7

9.5 57.3

16.6

4.5 0.82.0

Sources: McKinsey Global Institute, McKinsey Infrastructure Practice, “Infrastructure Productivity: How to save 1tn USD a year”, January 2013. National Economic

Counsel and the President’s Council of Economic Advisors, “An Economic Analysis of Transportation Infrastructure Investment”, July 2014.

Estimate need based on projected growth 2013-2030 assuming infrastructure stock is maintained at 70% of GDP.

Actual spend calculated using weighted average annual expenditure over years of available data, 1992-2011.

2

Key risks with infrastructure

27

Liquidity risk

Currency risk

Regulatory risks

2

Key pillars of strategy

28

Capitalise on the fund’s comparative advantages

Concentrate on assets with high cash flow visibility

Build on existing competence

Establish strategic partnerships

Preliminary thoughts

2

29

Should the fund invest in unlisted infrastructure?

Yes, but cautious approach is warranted, 0-5 percent range

2

30

3

Management framework

Government Pension Fund Act

Management mandate and ethical guidelines

Annual white paper. National budget and accounts

Norwegian Parliament

Ministry of Finance

Quarterly and annual reports. Advice on investment strategy

31

Index

Currency basket

Risk tolerance

Relative risk

Rebalancing

Financial investor

Not investable

Not given by index

Real estate adds equity-like exposure

No frequently updated market prices

Lack of liquid market place

Strategic investor

Mandate concepts do not work for unlisted3

Real estate index not investable

32

NBIM unlisted RE vs IPD – countries

Notes: IPD data is estimated market value as of year-end 2014, NBIM unlisted data is as of end Oct 2015. Category “Other” in IPD includes Australia (34%),

Canada (47%), New Zealand (3%), South Africa (7%), South Korea (9%).

3

US; 45%

UK; 26%

Germany; 3%

France; 9%

EU; 11%

Switzerland; 5%

Gross exposure NBIM unlisted RE

US; 39%

UK; 11%Germany; 6%

France; 6%

Other EU; 13%

Switzerland; 3%

Japan; 11%

Other; 10%

IPD

Currency basket?

33

3

GPFG currency basket

CHF

CZK

EUR

GBP

USD

Other (3)

GPFG unlisted real estate

AUD CAD

CHF CLP

CZK DKK

EUR GBP

HKD ILS

JPY KRW

MXN MYR

NZD PLN

RUB SEK

SGD THB

TRY USD

ZAR

GPFG FI benchmarkIPD

USD EUR GBP JPY

CHF CAD AUD HKD

KRW SEK MXN DKK

TWD INR ZAR RUB

SGD MYR PLN THB

BRL ILS TRY NZD

IDR CZK CLP PHP

AED COP EGP HUF

PKR

AUD EUR

CAD CZK

DKK HUF

JPY KRW

NZD PLN

ZAR SEK

CHF GBP

USD

Risk tolerance

34

Real estate investments add equity-like exposure

3

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

Hotels Industrial Office Residential Retail

Source: IPD, MSCI, NBIM calculations. US data only. Period 1991 to 2015.

De-smoothed IPD US return series, all auto correlation removed. For illustration purposes only.

Estim

ate

d B

eta

vs. U

S e

quity m

ark

et

We propose to keep as is

35

Ministry of Finance decides asset allocation

– Asset classes

– Ranges

– Rebalancing

Ministry of Finance decides performance measure and relative risk limit

– Reference index

– Currency basket

– Tracking error

33

36

To deal with these challenges…

The IPD index – not adequate

Currency composition of real estate portfolio differs from funding

Real estate not considered in owner’s risk tolerance

Real estate not included in relative risk calculations

3

37

…we propose

The IPD index – not adequate– reference index for fund made up of bonds and equities only

Currency composition of real estate portfolio differs from funding – real estate included in total currency risk

Real estate not considered in owner’s risk tolerance– real estate included in total market risk

Real estate not included in relative risk calculations – real estate included in relative risk

3

Advice

38

How much should the fund invest in real estate?

10 percent defined as a range of +/- 5 percent around target

Should the fund invest in unlisted infrastructure?

Yes, but cautious approach is warranted, 0 to 5 percent range

Is there a need to adjust the management framework?

Yes, a more holistic framework should be adopted,

while MoF takes the most important decisions

1

2

3

OUR MISSION IS TO

SAFEGUARD AND BUILD

FINANCIAL WEALTH

FOR FUTURE

GENERATIONS