The actual relative return, after costs, of Norway’s Government Pension Fund Global is estimated to be 24 basis points higher than the relative return of a passive indexing strategy, according to Norges Bank Investment Management (NBIM).

The country’s Ministry of Finance has asked NBIM to provide a review of the management of the GPFG as part of its upcoming review of the fund in spring 2022. Since its inception in 1998 to 30 September 2021, the fund has returned 6.49 per cent, measured in the fund’s currency basket. Net of management costs and inflation, the fund’s annual return since 1998 has been 4.52 per cent.

However, the Ministry of Finance has asked NBIM to provide updated analysis of the value-added through active management. NBIM is of the opinion that a passive strategy is not compatible with the investment strategy set by the Ministry or with the overall objective of the highest possible return after costs.

“If we compare the fund’s excess return after management costs with the results that we could have achieved with a passive indexing strategy, we can obtain an estimate of the value added by managing the fund actively,” NBIM stated.

For the period from 1998 through to 31 December 2020, NBIM found that the actual relative return after costs for the portfolio has been 24 basis points higher than the relative return on a passive indexing strategy after costs. The corresponding figure for the past five years is 15 basis points.

“The estimated difference between the fund’s actual excess return after costs and a passive strategy is very close to the fund’s excess return before costs. Norges Bank is therefore of the opinion that the excess return before costs is a good approximation of the value-added through active management.”

To estimate the results, NBIM assumed that a passive strategy would deliver the same return as the benchmark index while also generating revenue from securities lending. A passive strategy would also entail management costs, with the bulk of these costs related to purchases and sales of securities in connection with inflows into and withdrawals from the fund, changes to the investment strategy set by the Ministry, and changes resulting from index rules. There would also be staff costs and costs for various systems and data.

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