Norway Sovereign Wealth Fund Could Reduce Number of Companies in Reference Index

Posted on 04/09/2021

Holding positions in around 9,100 companies, Norway Government Pension Fund Global could be reducing the number of companies in its equity benchmark. The recommendation from the finance ministry calls for a reduction in the fund’s global company reference index of between 25% and 30% to better follow up companies, primarily by removing small-cap stocks. The recommendation adds, the SWF should not add, for now, more companies from emerging markets, including from Saudi Arabia, in the index governing its investment.

According to an April 9, 2021 press release from Norway’s Ministry of Finance, “The number of markets and companies included in the GPFG equity benchmark has increased significantly over time. The benchmark currently comprises about 8,800 companies across 24 developed and 22 emerging markets.

In the white paper, the Government proposes that the number of companies in the GPFG equity benchmark be reduced by omitting the 25–30 percent smallest companies from the benchmark. Such a modification will involve reducing the number of equity benchmark constituents by about 2,200 companies.

– Including a large number of companies and markets in the benchmark increases complexity, and may add to costs. It may also make it more challenging to maintain the role as a responsible investor, says the Minister of Finance.

The smallest index companies account only for a very small proportion of the overall market value of the equity benchmark. This may be illustrated by the fact that a quarter of the number of companies accounts for no more than two percent of the aggregate benchmark market value. Consequently, the diversification gains from the very smallest companies are limited. Moreover, the costs of trading in small company stocks are higher than that of large companies.

The Ministry observes that less information is available on small companies than on large companies, and that the Council on Ethics has commented that a reduction in the number of companies in the Fund would have a positive effect on its efforts.”

Norway GPFG uses the FTSE Global All Cap index from the FTSE Russell index as the basis for its own reference index. FTSE Global All Cap index included Saudi Arabia in March 2019 and Romania in September 2020.

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