Government Pension Fund – Global0 Annual5 Report 2005 2001 2002 2003 2004 2005 GOVERNMENT PENSION FUND – GLOBAL ANNUAL REPORT 2005 1 Key figures 2005. 2 Leader . 3 Introduction . 4 Report 1. Mandate . 10 2. Return in 2005 . 12 3. Fixed income management . 17 4. Equity management. 20 5. Corporate governance activities. 24 6. Risk. 29 7. Organisation . 32 8. Management costs . 35 9. Reporting of accounts. 36 Audit responsibility for the Government Pension Fund – Global . 38 Statement from the Central Bank0 Audit . .5 . 38 Documentation section Holdings of equities at 31 December 2005 . 40 Fixed income investments at 31 December 2005. 53 More information is available at Norges Bank’s website: www.norges-bank.no 2 Government Pension Fund – Global. Key fi gures 2005 Market value in NOK at 31.12.2005 In billions of NOK Total portfolio 1399 billion 1399.1 Equity portfolio 582 billion 1400 Fixed income portfolio 817 billion Transfers from the Ministry of Finance in 2005 (in NOK) 1300 220.3 billion Return in 2005 measured in international currencies 1200 Total 11.1 % Equity portfolio 22.5 % 1100 Fixed income portfolio 3.8 % 1016.4 Gross excess return in relation to the benchmark 1000 1.10 percentage point 900 845.3 800 700 613.7 609.0 600 500 386.4 400 300 222.4 171.8 200 113.4 100 47.8 0 -100 -200 1996 1997 1998 1999 2000 20012002 2003 2004 2005 Transfers Return measured Effect of a change in the krone Market value at 31.12 in international exchange rate (which has no effect currencies on international purchasing power) GOVERNMENT PENSION FUND – GLOBAL ANNUAL REPORT 2005 3 More active ownership The assets of the Government Pension Fund – Global rose by NOK 383 billion in 2005. This is the largest annual growth since capital was first transferred to the Fund in 1996. The market value of the Fund at the end of 2005 was NOK 1 399 billion. The Ministry of Finance transferred NOK 220 billion to the Fund in 2005. The return on the Fund was NOK 162 billion. Of this, NOK 36 billion was a result of the depreciation of the Norwegian krone, which has no effect on the international purchasing power of the Fund. Equity prices rose sharply for the third consecutive year. The return was 22.5 per cent. Since the trough in 2002, the total return on the Fund’s equity investments has been 70 per cent. The return on fixed income investments was 3.8 per cent in 2005. The total return on the Government Pension Fund – Global was 11.1 per cent measured in international currency. This is the third best annual result so far. Since 1997, the average annual net real return on the Fund has been 4.5 per cent. The total nominal return during this period has been NOK 309 billion. The Fund’s expected return and risk are largely determined by the strategy defined by the Ministry of Finance in the form of a benchmark portfolio. Norges Bank’s asset management is measured against this benchmark. In 2005, the Bank achieved an excess return of 1.10 percentage point, equivalent to NOK 12 billion. This is a very solid performance in relation to the risk taken in active management. Nearly all external and internal managers generated very strong results. Norges Bank has achieved an excess return on its asset management every year, and the contribution has averaged 0.52 percentage point. This is equivalent to a gross return of NOK 26 billion and NOK 24 billion after deductions of additional costs related to active management. Nevertheless, Norges Bank’s active management has not increased the Fund’s overall risk. This is because the active management is spread over many different types of activities that are not correlated with the return on the benchmark portfolio. The Ministry of Finance defined new ethical guidelines for the Government Pension Fund – Global at the end of 2004. Active corporate governance is one of the measures. In 2005, Norges Bank intensified its corporate governance activities considerably. As of 2005, all voting in externally managed portfolios has been transferred to the bank. The Bank voted on more than 20 000 resolutions at more than 2 700 General Meetings. A separate corporate governance group has been established as part of equity management to monitor the Bank’s ownership interests. The group has broad expertise in the areas of ethics, finance and corporate management. The primary objective of Norges Bank’s corporate governance activities is to protect the Fund’s financial interests. For long-term investors, financial and ethical considerations often coincide. The Annual Report sheds further light on this interplay. The report also discusses the Bank’s further development of its corporate governance activities. In addition, the report provides a thorough review of our asset management performance as well as the organisation and operations of asset management. Svein Gjedrem Knut N. Kjær Central Bank Governor Executive Director, Norges Bank Investment Management 4 Annual Report for the Government Pension Fund - Global The Government Pension Fund was es- between the return measured in interna- market risk of the benchmark. Thus, the tablished by the Storting (Norwegian tional currency and the return measured cost of active management has been low Parliament) by the Act of 20 December in NOK is due to movements in the krone in terms of higher risk. Operational costs 2005. The Government Pension Fund exchange rate, which have no effect on have been somewhat higher than if the comprises: The Government Pension the long-term international purchasing portfolio had closely mirrored the bench- Fund – Global (previously the Govern- power of the Fund. mark. The real value added through ment Petroleum Fund, established in Since 1997, the average annual return active management is estimated at an 1990) and The Government Pension has been 6.3 per cent, measured in inter- annual average of 0.48 percentage point. Fund – Norway (The National Insurance national currency. The cumulative The information ratio is one measure Fund, established in 1967). nominal return amounts to NOK 309 of skills in investment management. The The Government Pension Fund – billion. After deductions for inflation ratio is calculated as the ratio of the Global is a continuation of the Govern- and management costs, the annual net annual excess return to the excess risk ment Petroleum Fund. In this Annual real return is 4.5 per cent. taken in relation to the benchmark Report the new name, The Government In 2005, Norges Bank’s excess return (tracking error). In other words, the in- Pension Fund – Global, is used even was 1.10 percentage point compared formation ratio shows how much excess though the report primarily concernes with the benchmark portfolio defined by return is achieved for each unit of risk. the period when the Fund’s name was the Ministry of Finance. Since 1998, Since 1998, the information ratio has av- the Government Petroleum Fund. which was the first whole year with equi- eraged 1.32. ties in the Fund’s portfolio, the average The market value of the Fund at end- Key figures annual excess return has been 0.52 per- 2005 was NOK 1 399 billion. Since In 2005, the return on the Government centage point. This amounts to NOK 1996, the Ministry of Finance has trans- Pension Fund - Global was 11.1 per cent 26.3 billion for the entire period. ferred a total of NOK 1 154 billion to the measured in international currency. The The Ministry of Finance has given Fund. Of this, NOK 220 billion was return on the equity portfolio was 22.5 Norges Bank a framework for exercising transferred in 2005. per cent and the return on the fixed active management with a view to achiev- income portfolio was 3.8 per cent. Meas- ing an excess return. Since 1998, the Return 1997 - 2005 ured in NOK, the return on the Fund in market risk of the actual portfolio has Table 1 shows the return on the Govern- 2005 was 14.3 per cent. The difference been only marginally higher than the ment Pension Fund – Global. Since Table 1: Annual nominal and real return measured in terms of the Fund’s currency basket. 1997 - 2005. Per cent 1997 1998 1999 2000 2001 2002 2003 2004 2005 Average 1997-2005 Nominal return - on the equity portfolio - 12.86 34.81 -5.82 -14.59 -24.37 22.83 13.00 22.49 5.89* - on the fi xed income portfolio 9.07 9.31 -0.99 8.41 5.04 9.90 5.25 6.10 3.82 6.16 - on the total portfolio 9.07 9.25 12.44 2.50 -2.47 -4.74 12.59 8.93 11.09 6.34 Price infl ation ** 1.75 0.92 1.28 2.02 1.18 1.89 1.36 2.43 2.22 1.70 Real return 7.19 8.25 11.02 0.47 -3.61 -6.51 11.08 6.35 8.68 4.56 Management costs*** 0.04 0.06 0.09 0.11 0.07 0.09 0.10 0.11 0.11 0.09 Net real return 7.15 8.19 10.93 0.36 -3.68 -6.60 10.98 6.24 8.58 4.47 * 1998-2005 ** Weighted average of consumer price inflation in the countries included in the Fund’s benchmark portfolio during the year in question. *** Costs include fees to external managers for excess return achieved. 10.0 40 Net real return on the actual portfolio Equity portfolio Fixed income portfolio 30 8.0 Net real return on the benchmark portfolio 20 6.0 10 4.0 0 -10 2.0 -20 0 -30 1999 2000 2001 2002 2003 2004 2005 1998 1999 2000 2001 2002 2003 2004 2005 Chart 1: Average annual net real return since 1997 Chart 2: Annual return on the equity and fixed income portfolios, measured in terms of the Fund’s currency basket.