Low bond yields reflect global economic conditions: Governments, businesses and households are seeking to save more, while demand for safe investments has increased. Substantial asset purchases by central banks are pushing in the same direction. Low yields may also reflect modest expectations of economic growth further ahead. Historically, equities have yielded higher returns than bonds. We also expect that to be the case ahead. Still, it is doubtful that equity prices will continue to rise at the same pace as in recent years. Weak or moderate growth in the real economy will feed through to the return on equities. The share allocated to real assets has increased gradually after equities were first introduced in 1998. Soon, almost two-thirds of the fund will be invested in real assets. As we gain experience in real estate investing, it may be natural to invest in other types of real assets, or increase the equity allocation further. In the long run, a bond allocation of 20–25 percent should suffice to maintain the fund’s needed hedge against fluctuations in equity prices and execute the rebalancing strategy. Chart: Global investments Another of the fund’s characteristics, which in particular has an effect on risk management, is its large size. A main tool to manage the risk faced by the fund is diversification. With a fund of this size, we have ample opportunities to diversify.
In particular, the fund provided fiscal leeway during the economic setback in 2008 and 2009. Fund governance Let me now turn to the actual management of the fund. Chart: A fund owned by the Norwegian people The Ministry of Finance holds the political responsibility for the oil fund. The overall management principles and strategy are anchored in the Norwegian parliament, to which the Ministry reports at regular intervals. The operational management of the fund is fully delegated to Norges Bank. Our task as manager of the fund is strictly commercial: to maximise returns within the guidelines defined 2  BIS central bankers’ speeches  by the government. This structure ensures that the fund is not used as a foreign policy instrument. Individual investment decisions are made by Norges Bank Investment Management, a separate division within the central bank. Norges Bank reports on risk and return to the Ministry, and we also provide advice to the government on the investment strategy. The investment strategy Our management objective is to achieve the highest possible long-term return, with an acceptable level of risk. The investment strategy is developed by keeping in mind the fund’s objective as well as its key characteristics: its size and its long-term horizon. Let me elaborate on some important aspects. The fund’s purpose is to support long-term considerations in the spending of government petroleum revenues. Both current and future generations should benefit from the petroleum resources. Hence, the fund itself has a long-term investment perspective. This has fundamental implications for the investment strategy.