Return and risk GOVERNMENT PENSION FUND GLOBAL Press seminar Oslo, - - PowerPoint PPT Presentation

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Return and risk GOVERNMENT PENSION FUND GLOBAL Press seminar Oslo, - - PowerPoint PPT Presentation

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Return and risk GOVERNMENT PENSION FUND GLOBAL Press seminar Oslo, 20 March 2019 20/03/2019 1 INVESTMENTS 1.1 Investments _______________ 8 1.2 Reference index ___________ 16 1.3 Reference portfolio _________ 24 2 RETURN 2.1 Return

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SLIDE 1

20/03/2019

Return and risk

GOVERNMENT PENSION FUND GLOBAL

Press seminar

Oslo, 20 March 2019

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SLIDE 2

1 2 3

APPENDIX

Factor and risk-adjusted return

RETURN

2.1 Return ___________________ 36 2.2 Relative return _____________ 44 2.3 Return and costs ____________56

INVESTMENTS

1.1 Investments _______________ 8 1.2 Reference index ___________ 16 1.3 Reference portfolio _________ 24 3.1 Risk _____________________ 62 3.2 Relative risk _______________ 70 3.3 Risk adjustments ___________ 76

RISK

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SLIDE 3

Investments

3

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SLIDE 4

Management of the fund

4

Source: Ang et al (2014). Norges Bank Investment Management

Market Market index Reference portfolio Actual portfolio Reference index Ministry of Finance Norges Bank Investment Management

Investments

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SLIDE 5

Equity benchmark vs FTSE Global All Cap index

  • Investments. Table 8. By country. Billions of kroner

5

  • 1,000
  • 500

500 1,000 1,500 2,000 2,500

  • 1,000
  • 500

500 1,000 1,500 2,000 2,500 UK Germany France Switzerland Netherlands Czech Republic Malaysia Norway Canada US Absolute Deviation

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SLIDE 6

Fixed-income benchmark vs the BBGA index

  • Investments. Table 10. By currency. Billions of kroner

6

  • 400
  • 200

200 400 600 800 1,000 1,200

  • 400
  • 200

200 400 600 800 1,000 1,200 Euro Mexican Peso Swiss Franc South Korean Won Canadian Dollar Chilean Peso Norwegian Krone Indonesian Rupiah US Dollar Japanese Yen Absolute Deviation

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SLIDE 7

Reference portfolio adjustments - equities

  • Investments. Charts 5 and 7. Percent of fund

7

1 2 3 4 5 1 2 3 4 5 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to universe expansion in the reference portfolio for equities. Over-weighted stocks

1 2 3 4 5 1 2 3 4 5 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to systematic factors in the reference portfolio for equities. Over-weighted stocks

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SLIDE 8

Reference portfolio adjustments - fixed income

  • Investments. Charts 6 and 8. Percent of fund

8

1 2 3 4 5 1 2 3 4 5 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to the fiscal strength factor in the reference portfolio for fixed income. Under-weighted bonds

1 2 3 4 5 1 2 3 4 5 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Adjustments due to universe expansion in the reference portfolio for fixed income. Over-weighted bonds

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SLIDE 9

Contribution to relative return in 2018

  • Investments. Table 14. Percentage points

9

Equity Fixed income Total Universe expansion

  • 0.04
  • 0.09
  • 0.13

Systematic factors

  • 0.05
  • 0.05

Mandate requirements 0.01 0.01 Universe adjustments

  • 0.02
  • 0.02
  • 0.04

Reference portfolio versus the reference index

  • 0.12
  • 0.10
  • 0.22
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SLIDE 10

Contribution to relative return 2013-2018

  • Investments. Table 15. Annualised. Percentage points

10

Equity Fixed income Total Universe expansion

  • 0.01
  • 0.06
  • 0.07

Systematic factors 0.01 0.01 Mandate requirements 0.01

  • 0.01

0.00 Universe adjustments

  • 0.02
  • 0.02
  • 0.05

Reference portfolio versus the reference index

  • 0.01
  • 0.09
  • 0.11
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SLIDE 11

Return

11

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SLIDE 12

Absolute return - key figures

  • Return. Table 18. Annualised. Percent

12

Since 01.01.1998 Last 10 years Last 5 years 2018 Return on equity investments1 5.31 10.54 5.66

  • 9.49

Return on fixed-income investments 4.56 4.52 3.05 0.56 Return on unlisted real estate investments2

  • 7.19

7.53 Return on fund 5.47 8.33 4.75

  • 6.12

1 Since 01.01.1999. 2 Includes listed real estate investments from 1 November 2014 to the end of 2016.

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SLIDE 13

Absolute return - 5-year buckets

  • Return. Table 19. Annualised. Percent

13

1998-2002 2003-2007 2008-2012 2013-2017 Return on equity investments1

  • 4.85

16.28

  • 0.59

12.94 Return on fixed-income investments 6.26 4.00 5.87 2.96 Return on unlisted real estate investments2

  • 8.03

Return on fund 3.19 8.92 3.14 9.26

1 Since 01.01.1999. 2 Includes listed real estate investments from 1 November 2014 to the end of 2016.

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SLIDE 14

14

Equity management Fixed-income management Real estate management Allocation Total Fund allocation

  • 0.32
  • 0.10

0.19

  • 0.01
  • 0.24

Reference portfolio

  • 0.12
  • 0.10
  • 0.22
  • f which systematic factors
  • 0.05
  • 0.05

Allocations

  • 0.20
  • 0.01

0.00

  • 0.01
  • 0.21

Real estate 0.19 0.19 Unlisted real estate 0.24 0.24 Listed real estate

  • 0.05
  • 0.05

Security selection

  • 0.10

0.06

  • 0.04

Internal security selection

  • 0.14

0.06

  • 0.09

External security selection 0.05 0.05 Asset management

  • 0.06

0.04

  • 0.01

Asset positioning

  • 0.02

0.02 0.01 Systematic factors

  • 0.09

0.01

  • 0.08

Securities lending 0.04 0.02 0.06 Total

  • 0.47

0.00 0.19

  • 0.01
  • 0.30

Cont Contribution ributions to r s to rela elativ tive r e retu eturn 20 n 2018 18

  • Return. Table 32. Percentage points
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SLIDE 15

15

Equity management Fixed-income management Real estate management Allocation Total Fund allocation

  • 0.07
  • 0.10

0.04 0.02

  • 0.10

Reference portfolio

  • 0.01
  • 0.09

0.00

  • 0.11
  • f which systematic factors

0.01 0.01 Allocations

  • 0.05

0.00 0.00 0.02

  • 0.03

Real estate 0.04 0.04 Unlisted real estate 0.05 0.05 Listed real estate

  • 0.01
  • 0.01

Security selection 0.10 0.01 0.10 Internal security selection 0.00 0.01 0.00 External security selection 0.10 0.10 Asset management 0.10 0.08 0.01 0.18 Asset positioning 0.06 0.07 0.01 0.14 Systematic factors

  • 0.02

0.00

  • 0.02

Securities lending 0.05 0.01 0.06 Total 0.13

  • 0.01

0.04 0.03 0.18

Cont Contribution ributions to r s to rela elativ tive r e retu eturn 20 n 2013 13 - 2018 2018

  • Return. Table 33. Annualised. Percentage points
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SLIDE 16

Relative return after management costs

  • Return. Table 36. Annualised. Basis points

16

5 years Since inception The fund's relative return before management costs 3 25 The fund's management costs1

  • 5
  • 8

The fund's relative return after management costs

  • 2

16

1 The fund’s management costs is excluding costs related to unlisted real estate prior to 2017.

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SLIDE 17

Estimated relative return of a passive strategy

  • Return. Table 37. Annualised. Basis points

17

5 years Since inception Management costs of a passive strategy

  • 3
  • 5

Revenues from securities lending 6 6 Transaction costs related to replication of the benchmark index

  • 2
  • 4

Transaction costs related to inflows and extraordinary benchmark changes

  • 1
  • 5

Estimated relative return of a passive strategy

  • 7
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SLIDE 18

Estimated relative return difference

  • Return. Table 38. Annualised. Basis points

18

5 years Since inception The fund's relative return after management costs

  • 2

16 Estimated relative return of a passive strategy

  • 7

Estimated relative return difference

  • 2

23

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SLIDE 19

Risk

19

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SLIDE 20

Equity exposure

  • Risk. Chart 21. Percent

20

30 35 40 45 50 55 60 65 70 30 35 40 45 50 55 60 65 70 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

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SLIDE 21

Rolling return of 70 equity/30 fixed income

  • Risk. Chart 19. 5-year rolling return. Annualised. Measured in dollars. Percent

21

Source: Dimson-Marsh-Staunton Global Return Data

  • 10
  • 5

5 10 15 20 25 30

  • 10
  • 5

5 10 15 20 25 30 1900 1920 1940 1960 1980 2000 Equity contribution 70 equity/30 fixed income

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SLIDE 22

The fund’s expected absolute volatility

  • Risk. Chart 29. Percent

22

5 10 15 20 25 30 5 10 15 20 25 30 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Norges Bank Investment Management

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SLIDE 23

23

Equity management Fixed-income management Real estate management Allocation Total Fund allocation 11 9 26 5 30 Reference portfolio 9 9 12

  • f which systematic factors

7 7 Allocations 5 3 5 8 Real estate 26 26 Unlisted real estate 19 19 Listed real estate 9 9 Security selection 12 2 12 Internal security selection 10 2 10 External security selection 5 5 Asset management 6 2 7 Asset positioning 5 2 7 Systematic factors 3 3 Total 20 9 26 5 33

Expec Expected ted rela elativ tive v e vola

  • latili

tility ty

  • Risk. Table 41. All numbers measured at fund level. Basis points
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SLIDE 24

36-month correlation

  • Risk. Chart 25. 10-year US yield changes vs. S&P 500 price returns

24

  • 1.0
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.0 0.2 0.4 0.6 0.8 1.0

  • 1.0
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.0 0.2 0.4 0.6 0.8 1.0 75 80 85 90 95 00 05 10 15 Source: Bloomberg

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SLIDE 25

Recent and past stressed years

  • Risk. Chart 22. Asset class returns. Measured in dollars. Percent

25

  • 50
  • 40
  • 30
  • 20
  • 10

10 20 30

  • 50
  • 40
  • 30
  • 20
  • 10

10 20 30 1920 1931 2002 2008 Equity Fixed income Source: Dimson-Marsh-Staunton Global Return Data

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SLIDE 26

Fund performance in 2008

  • Risk. Chart 23. Percent

26

  • 40
  • 30
  • 20
  • 10

10 20 30 40

  • 40
  • 30
  • 20
  • 10

10 20 30 40 Fund, USD Fund, Currency basket Fund, NOK NOK/USD NOK/Currency basket

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SLIDE 27

MSCI World industry worst losses

  • Risk. Chart 28. 12-month and 60-month rolling basis.1970:1 – 2018:12. Percent

27

10 20 30 40 50 60 70 10 20 30 40 50 60 70 Consumer Staples Industrials Health Care Utilities Energy Materials Consumer Discretionary Financials Communication Services Information Technology 12 months 60 months Source: MSCI

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SLIDE 28

Regression analysis of relative return

  • Risk. Table 53. Equity mgt. Measured in dollars. Before management costs

28

Sample period Regression coefficients Intercept, bps annualised Market (MKT) Small vs Large (SMB) Cheap vs Expensive (HML) Profitable vs unprofitable (RMW) Conservative vs Aggressive Investment (CMA) Variance explained in percent (R squared)

Since 01.01.1999 32 0.02 0.05

  • 0.01

0.01

  • 0.02

45 Last 10 years 24 0.01 0.03 0.00

  • 0.02
  • 0.02

39 Last 5 years

  • 1

0.01 0.03 0.02 0.00

  • 0.04

36

Source: Norges Bank Investment Management, Kenneth French. Bold indicates significance at 5 percent confidence level.

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SLIDE 29

20/03/2019

Return and risk

GOVERNMENT PENSION FUND GLOBAL