A small revolution has been taking place at Folketrygdfondet (The National Insurance Scheme Fund), the manager of the €13.3bn Government Pension Fund – Norway. Forty years after its establishment, new legislation has just been passed to bring the fund more in line with its global sister fund.

“There is now a much clearer division of labour and a better management structure. The ministry of finance is the owner and we serve as the operational manager of the fund. We now manage the Norwegian part of the fund in the same way Norges Bank does with the global fund,” says Lars Tronsgaard, deputy managing director at Folketrygdfondet.

The Norwegian parliament accepted the new legislation for the fund on 8 June, which was put forward by the government in April with the aim of tidying up the regulatory framework of the scheme.

“We have now removed the ambiguity between the fund and the manager. Previously, they shared the same name and there was no clear division of responsibility between the two. The ministry of finance will in future set the benchmarks for the fund’s investments – work that is currently done by the board. We expect all changes to be in place by 1 January 2008,” Martin Skancke, director general at the asset management department at the ministry of finance, told nrpn.

The ministry of finance will decide on the benchmark, risk and bear responsibility for the fund’s returns, while Folketrygdfondet’s new mandate is to outperform the benchmark.

This is the last of several changes in both the administrative structure of the fund and its investment portfolio made in the last year. On 1 January 2007, the fund’s investment universe was expanded to include a 50 per cent exposure to equities and more exposure to the other Nordic markets. Half of the fund’s capital was also transferred back to the state at the end of last year as a result of the termination of deposits with the treasury. The fund was simply too large for the domestic government bond market and returning assets to the state was a practical solution to facilitate the management of the fund. This reduced its total allocation to bonds from 71 per cent to 42 per cent.

“We now have a portfolio with a completely different risk profile. We are very pleased with the changes and also believe our new portfolio will give us better returns as the share of equities will increase,” says Mr Tronsgaard.

The fund has also been given permission to invest up to 20 per cent of its equity assets in the other Nordic markets. At the end of 2006 it had 10 per cent invested in Nordic shares.

Although the Norway fund is only a fraction of the much bigger €231bn global government fund, it is the largest investor in the Norwegian market. It invests in more than 40 Norwegian companies and has 52.4 per cent invested in domestic stocks.

“Being such a large investor makes it difficult for us to make large changes to our domestic equity investments, since this would have a large impact on the Norwegian market. But in the Nordic market, on the other hand, we are relatively small and can change our portfolio more easily,” explains Nils Bastiansen, director of equities.

The fund has also been given access to the derivatives market and it is not out of the question that alternatives will become a part of its investment universe in the years to come.

Mr Tronsgaard adds: “If we believe any other asset classes can provide us with better returns, we will advise the ministry of finance to start investing in them. But the geographical division of our investments is likely to remain unchanged.”

The flurry of reforms has had much to do with the creation of the new asset management department within the ministry. The department was created in September 2006 to strengthen the management of the rapidly growing fund.

CHANGES IN BRIEF

• On 1 January 2006, the government pension fund was reformed and its name was changed from Folketrygdfondet to the Government Pension Fund – Norway. The former Petroleum Fund also became the Government Pension Fund – Global.

• The fund largely invests in its domestic market, but has since 2001 invested part of its assets in the rest of the Nordic equity markets.

• On 1 January 2007, new investment guidelines were introduced. The equity share was increased to 50 per cent and investments of up to 10 per cent in Nordic bonds were permitted.

• Stortinget, the Norwegian parliament, recently passed new legislation with the aim of tidying up the regulatory framework of the fund.

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