However, since the beginning the annual excess return on equities has been close to ½ percentage point. We have  2  BIS Review 53/2009  established an equity management strategy that seems to be fairly robust to market fluctuations and that has, as we have seen, generated solid returns viewed over a longer period. Developments in the Fund’s fixed income portfolio have followed a different path. The annual return on the actual portfolio was ½ percentage point lower than the return on the benchmark portfolio. The results were not due to investment in high-risk fixed income instruments. At the end of 2008, as much as 64 per cent of the bonds in the Fund’s fixed income portfolio had the best credit rating, AAA, 20 per cent had the second best, AA, while ten per cent were rated A. Five per cent of bonds were rated BBB, which is the rating the credit rating agency Standard & Poor’s has assigned companies such as Telenor and Statkraft. Only one per cent of the fixed income portfolio has a lower credit rating. Realised losses as a result of bankruptcies have been low. The following table provides a static situation report. As the recession follows its course, and the credit rating agencies continue to respond positively to criticism, ratings will probably be adjusted to a certain extent. The emphasis will nevertheless be on high-quality paper. How then can an excess return become negative from one year to the next?
To explain this, allow me to draw your attention to developments in yields on bonds with a BBB rating, i.e. among the less high quality bonds in the Fund’s portfolio. The above chart shows the pronounced changes in the difference in yield between these bonds and government bonds, or the credit spread. This does not per se reflect a higher risk of bankruptcies. If this were the case, perhaps half of these solid companies would have to file for bankruptcy in the course of a few years. In this analysis from the Bank of England, risk premiums on corporate bonds are instead divided into three components. One component takes account of expected losses and another uncertainty with regard to expected losses – in other words, fear. The third primarily indicates that these bonds have become illiquid, or more difficult to buy and sell. These liquidity premiums, and perhaps also premiums for the initial panic and fear, do not pose a problem for a fund like the Government Pension Fund. On the other hand, a prolonged period of fear and liquidity shortages – if the authorities are not able to reverse these developments – could lead to higher future losses. The Fund’s fixed income portfolio is well diversified across different types of bonds and different regions and the active strategies had low correlation in normal markets. However, the financial crisis revealed that these strategies were exposed to more underlying, systematic risk.