1

Norway’s Government Pension Fund and Challenges of Capital Flows

International Forum of Sovereign Wealth Funds

3 October 2013

Yngve Slyngstad, Chief Executive Officer

2

The Government Pension Fund Global

3

Sources: Facts – The Norwegian Petroleum Sector 2012; Statistics Norway, Ministry of Finance, NBIM

From resource to financial wealth

0

1

2

3

4

5

6

7

8

1999 2009 2030

Per

cent of N

ational w

ealth

S

To safeguard and build financial wealth for future generations

4

Large annual inflowsGovernment revenue from exploration, billions of kroner

Sources: Facts – The Norwegian Petroleum Sector 2013, Ministry of Petroleum and Energy; Revised National Budget 2013, Ministry of Finance

-5

0

5

10

15

20

25

30

-50

50

150

250

350

450

550

73 77 81 85 89 93 97 01 05 09 13

Petroleum Taxes

SDFI

Other (incl. Statoil dividend)

Projection

Inflows as percent of mainland GDP(right hand side)

5

A large fund Billions of US dollar and percent of Norwegian GDP

Source: Ministry of Finance (Revised National Budget 2013), NBIM

USD 788bn

Per cent of total GDP(right-hand axis)

0

50

100

150

200

250

0

250

500

750

1 000

1 250

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

6

Stortinget

(Norwegian Parliament)

Ministry of Finance

Norges Bank Executive Board

NBIM

Government Pension

Fund Act

• National Budget

• Annual white paper

• National Accounts

Mandate• Quarterly and annual reports

• Investment strategy advice

A fund owned by the Norwegian people

7

Petroleum revenues

+ return on investments

Pension Fund Global Transfer to finance

non-oil budget deficit

Non-oil revenues

Expenditures

Pension Fund

GlobalFiscal Budget

Fiscal policy guideline

(over time spend real return of the fund, estimated at 4%)

Fiscal policy guideline – 4% real return

8

Investment objectives

High return and moderate risk

Maintain international purchasing power

Financial investor

Long term

investor

Large

No fixed

liabilities

9

The investment strategy

10

What we invest inStrategic asset allocation

Source: NBIM

11

Why invest as we doReal returns (1900=1 USD)

Source: NBIM; Dimson, Marsh and Staunton

0

1

10

100

1,000

0

1

10

100

1,000

1900 1920 1940 1960 1980 2000

Bonds

Equities

Bills

12

Historic returnAnnualised real returns on major asset classes, percent

Source: Dimson, Marsh and Staunton

0.1

5.2 5

6.1

4.3

1.8

-0.3

1.0 0.9

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

2000-2012 1963-2012 1900-2012

Equities

Bonds

US Bills

13

Government bonds’ real yieldsPercent

-1%

0%

1%

2%

3%

4%

-1%

0%

1%

2%

3%

4%

06 07 08 09 10 11 12 13

United Kingdom

Germany

United States

Source: Barclays Capital

14

Real estate investmentsSelection of portfolio

UK

France

Germany

US EuropeSwitzerland

15

Asset mix of selected, large fundsData as of latest annual or quarterly reports

Source: Annual reports, NBIM calculations

GPFG

Equity

Fixed Income

Real Assets

Absolute Return

Cash/Other

ADIA

GIC

Future Fund

ABP

CPPIB

CIC

16

The challenge of ownership

17

Global EquitiesAverage ownership percentages

Source: NBIM, FTSE

0

0.5

1

1.5

2

2.5

3

0

0.5

1

1.5

2

2.5

3

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Europe

Americas, Africa and Middle East

Asia and Oceania

Global

18

Responsible investor

Investor characteristics Active ownership focus areas

Financial investor

Minority shareholder

Long-term horizon

Principle based Environmental and social risks:

� Children’s rights

� Climate change

� Water management

Markets:

� Well-functioning financial markets

Corporate governance:

� Equal treatment of shareholders

� Shareholder influence and board

accountability

19

Responsible ownership

Long term

Principle based

Financial investor

Minority stakeholder

20

Responsible ownership – level of interaction

90%

NO

K m

rd.

NOK 38,2 billion,(Q2 2013, Nestlé)

Principles forresponsible investment

applies to all companies

Active ownership is applied at materially significant holdings

2 006 Companies

495 Companies66%

Investment analysis

Principles & expectations

Standard setting &

collaboration

Company contact

Risk analysis

Voting & elections

100%,

8 253 Companies

21

Company interaction

� Voting

� Shareholder proposal

� Board nomination

� Ownership stakes

� Financial interest

22

1. Disclosing voting records

2. Disclosing voting principles

3. Corporate governance advisory board

4. Non-activist dialogue

5. Company ownership limit of 10%

6. Financial interest only

Voting disclosure and ownership principles

23

Legitimacy

As global government investor, we have to be

� respected,

� (professional in the way we do business, invest, execute)

� transparent,

� (report and explain activities)

� responsible,

� (long-term focus on sustainable value creation, and ownership governance principles)

NBIM Strategy Plan 2011-2013

24

� Annual and quarterly reports

including full IFRS financial

reporting

� Complete annual holding lists

and voting records after

general meetings published

� Governing documents,

correspondence and

research on website

� All public information

published on www.nbim.no

Transparency

25

Investment Strategy – Global Portfolio

26

Where we invest31.12.2012

27

New equity markets in 2012 and 2013

Equity

Bulgaria

Croatia

Jordan

Kenya

Qatar

Romania

Kuwait (2013)

Nigeria (2013)

Oman (2013)

28

New fixed income markets in 2012 and 2013

Fixed income (currency)

Chile (CLP)

China (CNY)

Czech Republic (CZK)

Hong Kong (HKD)

Hungary (HUF)

Israel (ILS)

Malaysia (MYR)

Philippines (PHP)

Russia (RUB)

Thailand (THB)

Taiwan (TWD)

Colombia (2013) (COP)

Changing the regional allocationTarget announced in Report to the Storting Nr. 17 (2011-2012); updated 30 June 2013

Emerging markets 6%

42%

39%

19%

35%

54%

11%

Emerging markets 9%

Source: NBIM, Ministry of Finance

29

30

Investments relative to GDP31 December 2012, USD billion

Source: IMF, NBIM

0

50

100

150

200

250

300

0

5 000

10 000

15 000

20 000

EU US China

GDP (left axis)

Fund's investments (right axis)

31

Size of economies and marketsBillion USD, September 2013

Source: Barclays

0

5 000

10 000

15 000

20 000

25 000

0

5 000

10 000

15 000

20 000

25 000

UnitedStates

UnitedKingdom

Japan Germany Brazil China India

GDP

Equity market cap

Bond market cap

32

Source: NBIM

Fixed-income investmentsPercent. 30. June 2013

39.5% 38.1%

25.4%

24.1% 29.5%

20.9%

6.3%5.2%

4.0%

15.4% 7.0%

9.7%

5.9 %8.8 %

8.2 %

1.7%0.6%

11.2%

7.3 % 10.8 %

20.5 %

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Market-weighted index* Share of fund's investments GDP-weighted portfolio

Other emerging

CNY

Other developed

JPY

GBP

EUR

USD

* The market-weighted index is based on the Global Aggregate and EM Local Currency Government Universal indices of Barclays

33

The challenges to free capital flows

34

Capital controls on inflows

“if the economy is operating near potential, if the level of reserves is

adequate, if the exchange rate is not undervalued, and if the flows are

likely to be transitory, then use of capital controls—in addition to

both prudential and macroeconomic policy—is justified as part of the policy toolkit to manage inflows.”

IMF Staff Position Note

SPN/10/04

35

Brazil’s IOF tax on fixed income inflows

-4

-2

0

2

4

6

8

-10

-5

0

5

10

15

20

31/12/2004 29/12/2006 31/12/2008 31/12/2010 31/12/2012

BOP, Financial Account, Foreign Portfolio Investment, Net, bnUSD - Brazil (LHS)

USDBRL Curncy (RHS)

IOF (RHS)

2004 2006 2008 2010 2012

Source: Central Bank of Brazil, Bloomberg, Itau, Natixis

36

OECD Declaration on Sovereign Wealth Funds and recipient country policies

� No protectionist barriers to foreign

investment

� No discrimination among investors

� Investment restrictions only if

legitimate national security concerns

� Restrictions should be transparent

and predictable

Source: OECD

37

Asset distribution – government fundsTrillion US Dollars

Source: Bloomberg, Sovereign Wealth Funds Institute, OECD Global Pensions Statistics

12

32

25

0

5

10

15

20

25

30

Central bank reserves Resource funds Currency funds Pension fund assets

38

Central bank reserve assets are risingTrillion US Dollar

Source: Bloomberg

0

2

4

6

8

10

12

0

2

4

6

8

10

12

03 04 05 06 07 08 09 10 11 12 13

International Reserve Assets

39

Growth in global debt securities outstandingTotal debt securities, trillion US dollars, September 2013

0

10

20

30

40

50

60

70

80

90

100

Dec.89 Dec.92 Dec.95 Dec.98 Dec.01 Dec.04 Dec.07 Dec.10

General government

Financial corporations

Non-financial corporations

Source: BIS

40