Report on the management of Norges Bank’s foreign exchange
reserves
Fourth quarter 2012
The foreign exchange reserves are to be available for intervention in the foreign exchange
market in connection with the implementation of monetary policy or to promote financial
stability. The reserves are divided into a money market portfolio and a long-term portfolio. In
addition, a buffer portfolio is used for the regular foreign exchange purchases for the
Government Pension Fund Global. Transfers are made to the buffer portfolio from the State’s
Direct Financial Interest in petroleum activities (SDFI) and from Norges Bank’s foreign
exchange purchases in the market. Within Norges Bank, the long-term portfolio is managed
by Norges Bank Investment Management (NBIM), while the money market portfolio and
buffer portfolio are managed by Central Banking Operations and reported on separately.
The long-term portfolio has a long-term investment horizon where the aim is to generate the
highest possible return within the constraints set out in the guidelines issued by Norges
Bank’s Executive Board. The portfolio has a strategic allocation to equities of 40 percent and a
strategic allocation to bonds of 60 percent. In 2012 the Executive Board made a number of
changes to the guidelines for the investment of the foreign exchange reserves. The main aim
of these changes was to further strengthen the liquidity requirement.
1
Key figures
An improvement in the financial situation in Europe contributed to broad gains on global
equity markets in 2012. Yields fell from already low levels in countries such as the US,
Germany and the UK , and from higher levels in countries such as Italy and Spain.
Chart 1-1 Long-term portfolio. Market value. Billions of kroner at year-end
The portfolio returned 9.80 percent in 2012. The return that NBIM generates on the actual
portfolio is measured against the return on a benchmark index defined by Norges Bank’s
Executive Board. The return on the portfolio was 0.94 percentage point higher than the
return on the benchmark index in 2012.
Since 1998, the long-term portfolio has generated an annualised return of 5.17 percent. The
annual net real return (i.e. the nominal return less management costs and inflation) since
1998 has been 3.17 percent. The average annual excess return during the period has been
0.20 percentage point.
Table 1-1 Key figures to 31 December 2012. Annualised data. M easured in an international
currency basket
Past year
Past 3 years
Past 5 years
Past 10
years
Since
01.01.98
Portfolio return (percent)
9.80
7.02
4.13
5.62
5.17
Benchmark return (percent)
8.86
6.22
3.65
5.40
4.97
Excess return (percentage points)
0.94
0.79
0.48
0.23
0.20
Annualised standard deviation (percent) 1)
3.59
4.93
8.24
6.24
5.32
Actual tracking error (percentage points)
0.46
0.58
1.45
1.06
0.88
Information ratio 2)
2.03
1.36
0.33
0.21
0.22
Gross annual return (percent)
9.80
7.02
4.13
5.62
5.17
Annual price inflation (percent)
1.78
1.97
1.78
2.05
1.88
Annual management costs (percent)
0.04
0.05
0.06
0.06
0.06
Annual net real return (percent)
7.84
4.90
2.25
3.44
3.17
1) The standard deviation is a measure of variations in the return during a period. Each monthly return is compared w ith the mean for the
period. The higher the standard deviation, the greater the variations relative to the mean and the higher the risk.
2) The information ratio (IR) is a measure of risk-adjusted return. It is calculated as the ratio of excess return to the actual relative market
risk (as measured by tracking error) to w hich the portfolio has been exposed. The IR indicates how much excess return has been
achieved per unit of risk.
2
Market value and return
The long-term portfolio’s market value was 227 billion kroner at the end of the fourth quarter
of 2012, a decrease of 2.7 billion kroner during the quarter. A positive return on investment
boosted its value by 4.3 billion kroner, while a stronger krone in relation to the currencies in
which the portfolio is invested reduced its value by 7.0 billion kroner.
2
Chart 2-1 Quarterly and accumulated annualised return since 1 January 1998. Percent
12%
Quarterly return
12%
10%
Accumulated quarterly return
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
2002
2004
2006
2008
2010
2012
Chart 2-2 Quarterly and accumulated annualised excess return since 1 January 1998.
Percentage points
4%
4%
Quaterly excess return
3%
3%
Accumulated quarterly excess return
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
-3%
-3%
2002
2004
2007
2009
2012
The long-term portfolio returned 1.82 percent in the fourth quarter, measured in
international currency. Equity investments returned 3.30 percent and fixed-income
investments 0.70 percent. Over the past ten years, the annualised return on the overall
portfolio has been 5.62 percent.
3
The return on the actual portfolio was 0.15 percentage point higher than the return on the
benchmark index in the fourth quarter of 2012. Over the past ten years, the average annual
excess return has been 0.23 percentage point.
Table 2-1 Key figures. Quarterly data
4Q
3Q
2Q
1Q
4Q
2012
2012
2012
2012
2011
Fixed-income investments
128.2
131.1
132.7
126.4
131.1
Equity investments
99.2
99.0
95.9
97.2
90.7
Overall portfolio
227.4
230.1
228.7
223.6
221.9
Inflows of new capital
0.0
0.0
0.0
0.0
0.0
Return
4.3
7.4
-1.1
10.9
7.7
-6.0
6.2
-9.2
1.9
Market value (billions of kroner)
Change due to movements in krone -7.0
Return in international currency (percent)
Equity investments
3.30
5.98
-4.04
11.55
8.32
Fixed-income investments
0.70
1.49
2.07
0.36
0.59
Overall portfolio
1.82
3.37
-0.58
4.93
3.61
Benchmark index
1.67
3.13
-0.48
4.32
3.40
Excess return (percentage points)
0.15
0.24
-0.11
0.61
0.21
Equity investments
0.27
3.16
-1.27
7.11
9.26
Fixed-income investments
-2.25
-1.21
5.01
-3.63
1.47
Overall portfolio
-1.17
0.62
2.28
0.76
4.52
Benchmark index
-1.31
0.39
2.39
0.17
4.30
Return in kroner (percent)
4
3
Market risk and management guidelines
Expected fluctuations in the value of the portfolio’s investments are measured using the
statistical measure expected volatility. The calculations use historical returns to estimate how
much annual returns can be expected to vary. As can be seen from Chart 3-1, expected
volatility fell to 7.1 percent during the quarter.
Chart 3-1 Expected absolute volatility. Percent (left-hand scale) and billions of kroner (righthand scale)
25
40
Percent
20
35
Billions of kroner
30
25
15
20
10
15
10
5
5
0
0
2010
2011
2012
Relative market risk in the portfolio is measured partly as expected relative volatility, or
tracking error. This is a statistical measure of risk which says something about the amount of
variation we can normally expect between the return on the benchmark index and the return
on the actual portfolio.
The guidelines for the long-term portfolio issued by Norges Bank’s Executive Board require
the portfolio to be managed with the aim that expected tracking error does not exceed 1
percentage point (100 basis points). At this limit, the annual return on the actual portfolio
under normal market conditions can be expected to deviate from the return on the
benchmark index by less than 1 percentage point in two out of every three years.
As can be seen from Chart 3-2, the portfolio’s tracking error was largely unchanged over the
quarter and was estimated at 47 basis points at the end of the period. An important source of
5
tracking error over the past year has been a higher equity allocation in the portfolio than in
the benchmark index.
Chart 3-2 Expected tracking error. Long-term portfolio. Basis points
120
120
100
100
80
80
60
60
40
40
20
20
0
0
2010
2011
2012
As can be seen from Chart 3-3, expected tracking error was relatively low in 2012 for both
equity and fixed-income investments.
Chart 3-3 Expected tracking error. Equity and fixed-income investments. Basis points
140
140
120
Equities
Fixed income
120
100
100
80
80
60
60
40
40
20
20
0
0
2010
2011
2012
6
Table 3-1 breaks down the fixed-income portfolio (excluding cash) by type of instrument and
credit rating.
Table 3-1 Fixed-income portfolio by credit rating as at 31 December 2012
(Percentage of fixed-income portfolio)
Government bonds
AAA
AA
A
BBB
Low er
Total
71.93
26.86
0.00
0.00
0.00
98.79
Government-related bonds
0.00
0.00
0.00
0.00
0.00
0.01
Corporate bonds
0.00
0.00
0.00
0.01
0.06
0.07
Securitised debt
0.00
0.00
0.00
1.13
0.00
1.13
71.93
26.86
0.00
1.14
0.07
100.00
Total fixed-income securities
Table 3-2 provides an overview of risk and asset allocation in the long-term portfolio. There
were no breaches of the Executive Board’s guidelines in the fourth quarter of 2012.
Table 3-2 Key figures for risk and asset allocation
Risk
4
Limits
Actual
31.12.12
30.09.12
30.06.12
0.47
0.48
0.44
M arket risk
(percentage points)
1.0 percentage point expected
tracking error
Asset allocation
(percent)
Fixed-income investments
56.4
57.0
58.0
Equity investments
43.6
43.0
42.0
Financial reporting
Financial information for the long-term portfolio in Norges Bank’s foreign exchange reserves
is presented below. The financial reporting forms part of, and comprises excerpts from,
Norges Bank’s financial statements.
Accounting policies
The accounting information for the fourth quarter of 2012 includes profit and loss accounts
and balance sheets prepared in accordance with the classification, measurement and
presentation policies for Norges Bank, but without notes. A presentation of the accounting
policies applied in the preparation of this accounting information can be found in Norges
Bank’s Annual Report for 2012.
7
The preparation of the financial reporting for Norges Bank involves the use of estimates and
judgements which can affect assets, liabilities, income and expenses. The accounting policies
presented in Norges Bank’s Annual Report for 2012 contain further information on significant
estimates and assumptions.
Operating expenses
NBIM’s total costs associated with the management of the long-term portfolio amounted to
88.8 million kroner in 2012, which corresponds to 0.04 percent of average assets under
management.
Table 4-1 Long-term portfolio – profit and loss account
Quarter
(Figures in millions of kroner)
Year to date
4Q 2012
4Q 2011
31.12.12
31.12.11
Interest income, deposits in foreign banks
1
6
6
22
Interest income, lending associated w ith reverse
repurchase agreements
1
1
2
27
3 687
6 363
15 598
-6 224
672
1 384
5 900
11 690
1
-67
-37
99
Interest expenses, borrow ing associated w ith
repurchase agreements
0
8
0
-21
Other interest expenses
-1
-8
-3
-9
-13
-22
-13
-22
0
0
0
-1
Profit/ loss before foreign exchange
gains/ losses
4 347
7 666
21 451
5 562
Foreign exchange gains/losses
-7 037
1 926
-15 937
4 475
Profit/ loss
-2 691
9 592
5 515
10 037
Net income/expenses and gains/losses from:
- equities and units
- bonds and other fixed-income securities
- financial derivatives
Tax expenses
Other expenses
8
Table 4-2 Long-term portfolio – balance sheet
(Figures in millions of kroner)
31.12.12
31.12.11
106
69
1 546
1 313
1
162
96 520
90 778
2 821
-
125 496
132 023
Bonds lent
-
71
Financial derivatives
6
2
2053
43
228 549
224 462
Short-term borrow ing
0
-0
Borrow ing associated w ith repurchase agreements
0
137
1 160
72
Unsettled trades
0
-0
Short-sold bonds
-
-
Financial derivatives
4
49
Other liabilities
2
2 335
1 166
2 593
227 384
221 869
FINANCIAL ASSETS
Deposits in foreign banks
Lending associated w ith reverse repurchase agreements
Unsettled trades
Equities and units
Equities lent
Bonds and other fixed-income securities
Other assets
TOTAL FINANCIAL ASSETS
FINANCIAL LIABILITIES
Cash collateral received
TOTAL FINANCIAL LIABILITIES
NET PORTFOLIO
9
Long-term portfolio Benchmark index as at 31 December 2012. Percent
Equities
Country for equity benchmark
Currency for fixed-income
benchmark
Asset class w eights
Strategic
benchmark index
Bonds
Actual benchmark
index
41.2
40.0
Belgium
0.5
Finland
0.4
France
4.0
Greece
0.1
Ireland
0.1
Italy
1.1
Netherlands
1.1
Portugal
0.1
Spain
1.3
Germany
3.6
Austria
0.2
Euro area (euros)
Strategic
benchmark index
60.0
Actual benchmark
index
58.8
12.4
36.8
UK (pounds)
8.8
11.3
Denmark (kroner)
0.5
Sw itzerland (francs)
3.5
Sw eden (kronor)
1.4
Total Europe
26.6
48.0
US (dollars)
50.9
42.9
Canada (dollars)
4.7
Israel (shekels)
0.3
Total Americas and
Africa/ M iddle East
55.9
Australia (dollars)
3.8
Hong Kong
2.2
Japan (yen)
8.0
New Zealand (dollars)
0.1
Singapore (dollars)
0.9
South Korea
2.6
17.5
Total Asia and Oceania
10
42.9
9.1
9.1
Appendix
Largest equity holdings as at 31 December 2012
Company
Country
Holding in millions of kroner
Apple Inc
US
1 642
Exxon Mobil Corp
US
1 310
Royal Dutch Shell PLC
UK
753
Microsoft Corp
US
742
General Electric Co
US
737
International Business Machines Corp
US
726
Nestle SA
Switzerland
708
Chevron Corp
US
708
Samsung Electronics Co Ltd
South Korea
689
HSBC Holdings PLC
UK
648
Largest bond holdings as at 31 December 2012
Issuer
Country
Holding in millions of kroner
United States of America
US
55 136
French Republic
France
22 493
Federal Republic of Germany
Germany
21 787
UK Government
UK
13 342
Japanese Government
Japan
11 214
Ayt Cedulas Cajas X Fondo de Titulizacion
Spain
481
Cedulas TDA
Spain
477
Ayt Cedulas Cajas Global
Spain
254
Bankia SA
Spain
211
Lehman Brothers Holdings Inc
US
42
Largest percentage holdings as at 31 December 2012
Company
Country
Holding in
percent
Collins Foods Ltd
Australia
0.54
Hyundai Mipo Dockyard
South Korea
0.27
Okabe Co Ltd
Japan
0.24
Zappallas Inc
Japan
0.23
Olam International Ltd
Singapore
0.22
Yorozu Corp
Japan
0.17
Aiful Corp
Japan
0.17
Nexen Corp
South Korea
0.17
Challenger Diversified Property Group
Australia
0.17
Atlas Iron Ltd
Australia
0.16
11