Beyond this, the Bank has limited responsibility and room for determining the overriding investment strategy, especially in comparison with other large public investment funds. An example is the Singapore Government Investment Corporation (GIC), where the country’s finance ministry also formulates a mandate with a benchmark portfolio and investment limits, but the board of the GIC has greater responsibility for actual asset allocation than Norges Bank’s Executive Board. Another example is the Canada Pension Plan Investment Board. The governance structure of this fund differs even more from our own in that the board itself draws up the investment strategy pursuant to a statutory objective. Chart: Asset allocation in the GPFG, GIC and CPPIB. At the same time, there are considerable differences between the asset allocation in the GPFG and that in the Canadian and Singaporean funds. This probably reflects the differences in governance structure as governance structure and organisation set a framework for the investment strategy to be pursued. In the consultation response to the Central Bank Law Commission’s recommendations, we place emphasis on the relationship between governance, organisation and strategy. I shall return to this shortly. First, however, remember that in addition to defining the investment strategy, the mandate from the Ministry of Finance contains specific reporting requirements. Thanks to its extensive reporting, the GPFG enjoys a reputation of being one of the world’s most transparent sovereign wealth funds. For a fund with the entire population as actual owners, transparency is vital for ensuring democratic control and confidence in investment management.
There are economies of scale in the beta function. We see commercial managers that are providers of beta-exposure that are up to 15 times the size of the Government Pension Fund. Yet we are able to perform these tasks more cost-efficiently in-house. Hence we believe we now are sufficiently large so as to harvest most of the benefits of scale. Economies of scale are more elusive when it comes to active management. On the one hand the excess return potential is reduced because there will be a higher degree of market impact. On the other hand, size can be an advantage in obtaining access to information and in active positions where the objective is to reap the benefits of being a liquidity provider. The setting for the Government Pension Fund with its long investment horizon is well suited for such an objective. All of the passive investment (enhanced indexing) is done internally both for equities and fixed income. On the active side however, we use a large number of external managers. The split differs between equities and fixed income. On the fixed income side, most of the active risk is taken internally while the opposite is the case for equities. In total, about 60 per cent of the active risk stems from external managers. The guiding principle behind this choice is an assessment of expected returns after costs, and a strong belief in diversification among managers. There is no favouring of internal (or external) managers.