Oil incomes spending in sovereign fund of Norway (GPFG)

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This paper presents the models for determining the optimal percentage of spending of savings and reinvestment from the point of view of an individual investor, taking into account his labor income in the future. Usual expenses are required due to unfavorable market conditions (for example, spending the funds in excess of 4% of GDP). Analysis of optimal consumption and reinvestment depends on the level of the risk – free interest rate, which can be determined on the basis of discount rates for large infrastructure projects. The current Norwegian budget rule is set in such a way that the current generation of Norwegian citizens will receive more support for future generations. The article proposes a new annuity model of spending sovereign funds, taking into account the risk-adjusted interest rate of return. The main conclusion is that the risk-free (bond) part of the portfolio should not change after an unexpected fall in market value. The risky share of the portfolio is adjusted after each change in the quotations of the securities.

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    • Figure 1. GPFG relative cumulative yield since 1998
    • Figure 2. Equity portfolio relative yield of GPFG (solid line) versus benchmark (dotted line) since 1998
    • Figure 3. Fixed portfolio relative yield of GPFG (solid line) versus benchmark (dotted line) since 1998
    • Figure 4. Real estate portfolio relative yield of GPFG
    • Figure 5. Assets of the Reserve Fund of the Russian Federation (solid line, left scale – billion USD, solid line, right scale – % of GDP)
    • Table 1. Share of annual spending of the GPFG