NORWAY - Norges Bank Governor Svein Gjedrem signaled his opposition to removing Norway's $520bn oil fund from the central bank after a Cabinet minister suggested the fund's size may require putting it under new management in future.
"Norges Bank has been important for the oil fund in the past and I think also in the future that may be the case," Gjedrem said in an interview in Oslo yesterday. Asked whether there is any need to change the management structure, he said "not if you look at the results of the fund; they have been very satisfactory."
Gjedrem, who's due to step down as governor when his second and final six-year term ends in December, said the current management setup has "functioned well" and will probably do so in future. His successor may be less resistant to change. Oeystein Olsen said in an Oct. 23 interview with Finansavisen it may be "natural" to separate the fund from the central bank because of its size. It will grow to twice the value of Norway's economic output in a decade, Gjedrem said in a speech yesterday.
"There is a clear division of labor between the Finance Ministry, as the owner that gives the central bank a mandate, and the individual investment decision is the responsibility of the Norges Bank Investment Management," Gjedrem said.
Finance Minister Sigbjoern Johnsen said on March 26 he couldn't rule out that the fund may be separated from the central bank in the future, without elaborating on whether a separate unit might be created to manage the fund. His ministry has formed a council with external members that will present an evaluation of the fund's strategy later this year.
In an interview in Oslo today, Johnsen said "the management of the fund is well-placed in the central bank for the time being."
Even so, "the size of the fund is a challenge but then we have altered some of the mandates and guidelines for the central bank and I think it is very fair now that these changes get a possibility to work." Still, "the issue will come back some time in the future."
Gjedrem (pictured) said in the speech that "a clear division of responsibility between the Ministry of Finance as owner and Norges Bank as manager is an important component of the Norwegian model. It is important that transparency and accountability are prominent features."
The Government Pension Fund Global, built from Norway's oil and gas revenue, gets its investment guidelines from the government and is managed by the central bank. Norway is the world's seventh-biggest oil producer and second-largest gas exporter. The state requires the fund to keep about 60 percent in stocks, 35 percent in bonds and 5 percent in property investments.
The fund mostly buys securities in proportion to their weights in global indexes. By using its leeway to stray from those benchmarks using active management, the fund aims to boost investment returns. The strategy was criticized after active management of its bond holdings contributed to a record loss in 2008.
The Finance Ministry this year proposed tightening the range by which the fund can deviate from the benchmark it tracks. The scope for management, measured as an estimated tracking error, should be cut to 1 percentage point from 1.5 percentage points, according to the proposal.
The fund in October proposed adding infrastructure and private equity investments to its portfolio. The Finance Ministry said it would comment on the proposal in the spring.
The fund invests petroleum revenue outside the country of 4.9 million people to avoid stoking inflation and is Europe's biggest owner of stocks. It is the world's second-biggest sovereign wealth fund after the Abu Dhabi Investment Authority and has had a nominal annual return of 4.33 percent since 1998.
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