Norway FinMin Removes EM Bonds from SWF Fixed Income Benchmark
Posted on 04/05/2019
Norway’s Ministry of Finance revealed important alterations to the fixed income benchmark of Norway Government Pension Fund Global. The finance ministry removed emerging market government bonds and emerging market corporate bonds from the fixed-income benchmark of Norway’s sovereign wealth fund. The wealth fund can still be invested in emerging market bonds as part of the Norges Bank Investment Management’s active management, but is subject to an upper limit set by the finance ministry. The proposed cap on EM bonds is at 5% of the fixed income portfolio.
The finance ministry sees the change as lowering transaction costs in the management of the sovereign fund.
According to a press release from the Finance Ministry,”In 2017, it was decided to increase the equity share of the GPFG to 70 percent. In view of this decision, the Ministry of Finance initiated a review of the fixed-income framework and benchmark for the Fund. Advice and assessments have been obtained from both Norges Bank and an expert group.”
In addition, the ministry stated, “In the report to Parliament, the Ministry of Finance proposes to omit emerging market government bonds and emerging market corporate bonds from the benchmark for the GPFG. The proposal is not based on assessments of individual countries or issuers, but is according to the country classification of the index provider Bloomberg. The following government bond issuers are at present classified as emerging markets and will be removed from the benchmark index: Chile, the Czech Republic, Hungary, Israel, Malaysia, Mexico, Poland, Russia, South-Korea and Thailand.”
Norges Bank still recommends the composition of the government portion of the fixed income benchmark is still to be based on GDP weights, although subject to certain technical modifications. The finance ministry also proposes that corporate bonds shall continue to account for 30% of the fixed income benchmark index, as at present.