Long-Term Outlook for Fixed Income and Equity Return

Abstract

The investment horizon applied to the Petroleum Fund and the foreign exchange reserves is long. Parts of the Petroleum Fund are phased into the Norwegian economy via the fiscal spending rule each year, but the fund’s life expectancy is probably unlimited. An average maturity profile can be calculated from the fiscal spending rule which on reasonable, but uncertain, assumptions produces a duration of about 35 years. In this report we apply an assessment horizon of 10-15 years. This is shorter than the average maturity profile, because we believe information of a nature likely to affect return 10-15 years ahead should be reflected in the strategic asset allocation. This horizon is at the same time substantially longer than that applied for active management purposes. [...] Norges Bank aims to present strategy reports on an annual basis. They will be two-pronged: one part will discuss the long-term market outlook; another will discuss what implications this has for strategic portfolio choice given the respective purposes of the Petroleum Fund and the foreign exchange reserves. These yearly reports will be confined to asset classes currently included in the funds’ investment universe. Every third year Norges Bank will carry out a comprehensive analysis in which all aspects of the strategic asset allocation will be reviewed. This analysis will be less frequent due to the slower pace of change in information relevant to new asset classes and markets. The present report is Norges Bank’s annual assessment of the market outlook.