Norway’s Government Pension Fund Global (GPFG), managed by Norges Bank Investment Management (NBIM), has considered adjusting its benchmark index for equities following an increase in small companies in emerging markets.

NBIM outlined its views on this subject area in a letter to the Norwegian Ministry of Finance, sent in December 2024.

It referred to a letter sent to the GFPG from the Ministry of Finance in October 2024, which suggested the number of small companies in the FTSE Global All Cap, on which the GPFG’s index is based, has increased “significantly” following the Ministry of Finance's decision in 2021 to reduce the number of small companies in the benchmark index.

This increase is also reflected in the GPFG's benchmark index, particularly the emerging markets part.

The Ministry of Finance asked NBIM to assess the consequences of the increase in the number of companies in the FTSE Global All Cap for the composition of the new benchmark index with 96 per cent market coverage.

It also asked NBIM to evaluate the new index against what was communicated in the 2021 White Paper.

In addition to this, the Ministry of Finance requested an assessment of whether it was appropriate to adjust the rules of the benchmark index and if these adjustments could be made to align the benchmark with the description in the 2021 White Paper.

The GPFG’s investment strategy means that the fund’s return and risk characteristics largely mirror those of the benchmark index, therefore playing an important role in the management of the fund.

Research found that the number of companies in the index has increased, reaching nearly 9,000 in 2021.

The Ministry of Finance decided in 2021 that the number should be reduced by 25–30 per cent, corresponding to a market coverage of 96 per cent and assumed this would result in 6,600 companies in the index.

The Ministry of Finance identified the smallest companies constitute for a very small part of the total market value of the index and the diversification benefits of including the very smallest companies were considered limited.

In addition to this, it highlighted a large number of small companies in the index could increase both the complexity of the management of the fund and the management and transaction costs. It said there was generally less information available about small companies.

However, since the decision was made in 2021 by the Ministry of Finance to reduce the number of companies in the benchmark index, the number of small companies in the FTSE Global All Cap index has increased significantly.

The number of companies in the benchmark index with a 96 per cent market coverage has increased to 7,300 since 2021, due to the inclusion of more companies from emerging markets.

The increase in the number of companies since 2021 is expected to have a small impact on the index's long-term return and risk characteristics.

Despite the number of small companies in emerging markets increasing, the index's overall exposure to small companies has decreased somewhat and its overall exposure to emerging markets has decreased since 2021.

NBIM said there were several solutions to maintaining the reduction of the number of companies, including reducing the market coverage in the equity index further from 96 per cent.

However, it suggested the relationship between market coverage and the number of companies in the index would not be constant.

It also suggested that the number of listed companies in emerging markets was the "main driver" of the increase in the number of companies in FTSE Global All Cap over the period, therefore an index that does not include the segment of small companies in emerging markets could have a more stable number of companies.

It recommended that the Ministry of Finance should consider removing small companies in emerging markets from the benchmark index.

In particular, NBIM pointed out that small companies in emerging markets comprise approximately 22 per cent of the number of companies in FTSE 96, but account for under 1 per cent of the market value.

If this is removed, NBIM estimated the total benchmark index for equities would consist of approximately 5,700 companies. It said that despite this change, the effects would be minor.

It also stated that an adjustment of the benchmark index would entail one-off costs, and advised the changes should be phased in over time to minimise costs.

---