The manager of Norway’s Government Pension Fund Global (GPFG) is proposing removing the smallest 22% of companies from its current benchmark – a change which would excise thousands of Chinese stocks from its NOK19.8trn (€1.7trn) portfolio.
The advice, contained in a letter to the Finance Ministry published today, is aimed at reversing the effects of a sharp rise in the number of stocks in its benchmark in 2023, and bringing the figure down to what was intended in a 2021 change to the sovereign wealth fund’s benchmark.
The GPFG’s tally of stocks increased particularly in 2023 as a result of the Stock Connect trading mechanism linking Shanghai and Shenzhen exchanges with the Hong Kong exchange enabling foreign investors to trade equities in mainland China.
In the letter, NBIM said it was responding to the ministry’s end-October 2024 request to, inter alia, assess the consequences of the increase in the number of companies in FTSE Global All Cap for the composition of the new benchmark index with 96% market coverage — which had been decided on in 2021.
The number of companies the GPFG invests in was reduced in 2021 by 25-30% for several reasons including the extra costs and complexity of managing a large number of small company stocks. By that point, having increased over time, the number of companies in the index had reached nearly 9,000.
Having weighed options for maintaining the 2021 reduction in the number of companies, NBIM said in its letter: “The number of listed companies in emerging markets has been the main driver of the increase in the number of companies in FTSE Global All Cap over the period.
“An index that does not include the segment of small companies in emerging markets could have a more stable number of companies going forward.
“The Ministry should therefore rather consider removing small companies (so-called small caps, defined by FTSE Russell as companies representing the smallest 10% of total market capitalization) in emerging markets from the benchmark index,” it said in the letter, signed by Ida Wolden Bache, governor of Norges Bank, the Norwegian central bank, and Nicolai Tangen, chief executive officer of NBIM.
The pair said small companies in emerging markets constituted about 22% of the number of companies in what it termed “FTSE 96”, but accounted for under 1% of the market value.
Removing that segment would reduce the number of companies in the total benchmark index for equities to approximately 5,700, NBIM estimated.
“The largest decrease in the number of companies would be in China, followed by India and Taiwan,” it said.
NBIM manages the GPFG close to its benchmark index, although all its internal investment strategies have active elements.
At the end of 2023, the fund – whose mandate is for a 70/30 equity/bond split – was invested in 8,859 companies, while its equity index comprised 9,191 companies at the same time.
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