Trying to Beat the Market : An Empirical Analysis of the Historical and Potential Active Returns of the Government Pension Fund Global
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- Master Thesis 
The Government Pension Fund Global (hereafter the GPFG) helps finance the Norwegian welfare state and aims to be managed in such a way that it benefits both current and future generations. Today, the fund is managed closely to a benchmark index based on a mandate determined by the Ministry of Finance, but it is also managed actively to generate excess returns. The active management of the fund is a heated topic and there have been frequent debates related to the management model of the fund. This thesis aims to contribute to the discussion and investigates the historical and potential active management and returns, through our research question: “How has the active management and accompanying active returns of the GPFG been historically, and how could increased active management impact active returns?” Our thesis rests on three supportive analyses: a historical analysis evaluating fund performance and active management, a scenario-analysis investigating potential active returns, and lastly a qualitative study validating our findings. We first analyse the historical active returns and management of the fund. We find that active returns predominantly have been significant throughout the investigated time periods, and that active management has created additional returns for the fund, both in terms of benchmark risk-adjusted alpha and factor risk-adjusted alpha. We further establish the historical degree of active management and find an average active share of 18.92% from 2015 to 2020 and an annual tracking error of 0.63% since inception, essentially defining the GPFG as an index fund. Furthermore, we construct three synthetic portfolios combining the GPFG with the New Zealand Superannuation Fund, to analyse active returns of portfolios with higher degrees of active management. All three synthetic portfolios outperform the GPFG’s historical active returns both in-sample and out-of-sample, clearly indicating that there exists an opportunity for the GPFG to increase its active returns by increasing active management. Our initial findings are further evaluated in light of existing empirical research in the field of active versus passive management, where the broad consensus contradicts our quantitative findings. After having emphasized empirical research, we still find that active management and its accompanying returns have created significant value historically and that the fund could increase its active returns by increasing active management. Additionally, we question why the tracking error limit set by the Ministry of Finance is not exploited, and further recommend that this should be considered.