Equity Allocation in the Government Pension Fund Global

Abstract

The equity allocation in the Government Pension Fund Global has a major impact on the fund’s overall long-term risk and return. The purpose of this study is to examine the optimal equity allocation in the GPFG by analyzing the different components that affect the decision. Our study complements prior assessments of the equity share. The evidence from this study suggests that the peer institutions take higher risk than the GPFG. We find that the GPFG has a competitive advantage due to specific fund characteristics and can therefore have a higher allocation to equities than the global market portfolio. We also find that the national wealth has similar characteristics to a corporate bond. However, the overall risk has increased since the previous equity assessment, as equity-like assets account for a higher share of the total national wealth. The results show that with the current fiscal rule, the fund is unlikely to maintain its real value in the future.