Finally, I will briefly touch upon a number of recent policy proposals. On the basis of these ideas, and drawing on the history of central banking, I will then offer some personal reflections on what a simple but effective policy response might look like. In closing, I will briefly comment on the Government of Singapore Investment Corporation (GIC), one of the most prominent SWFs in the world. As you know, UBS last week turned to the GIC for a substantial capital injection in connection with losses in the sub-prime credit markets. BIS Review 150/2007  1  2. The rise in sovereign wealth funds  I noted at the outset that the rapid growth in SWFs is largely a by-product of global macroeconomic imbalances. Slide 3 shows that the current account deficit of the US has increased every year since 1992. The deficit surpassed USD 800 billion, or 6 percent of GDP, in 2006. Such a large current account deficit is unprecedented in US history. 1 This rise in the US current account deficit has been mirrored almost one to one in the combined rise of surpluses in South East Asian countries and oil exporting countries. I will refer to these two country groupings as the surplus regions. By definition, the surplus regions are investing less than they are saving, and hence, both regions are accumulating net financial claims on foreigners. But the underlying reasons for the current account surpluses in the two regions are distinct.
The Fund’s own history includes a period that illustrates the importance of not changing strategy during a downswing. After the dotcom bubble burst in 2000, the value of the Fund’s equity holdings fell sharply for a period. At the same time, the Fund’s fixed-income investments partly offset the losses on the equity side. Norges Bank is the operational manager of the Government Pension Fund – Global. Since the Fund’s establishment, we have built up an organisation that is capable of implementing the strategy laid down by the Ministry of Finance. Pursuant to the mandate assigned to Norges Bank, we seek to generate value added in excess of the return that follows from the strategic allocation. The Fund has achieved an average annual real return of 4.25 per cent since 1997. The contribution to the return from active management has averaged 0.39 per cent annually in the same period. Active management has thus made a contribution of about 9 per cent of the Fund’s total return. This result has been achieved without changes in the Fund’s return variability or risk exposure. Norges Bank’s investment management has thus improved the risk to return trade-off. In the long run, even a small percentage increase in the average annual rate of return will have a substantial impact on the Fund’s size. A stated goal of operational management is that a large number of investment decisions are to be taken independently of each other both at a given point in time and over time.