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Staying in sovereign investments

Ramona Santiago, head of reserve management, Bangko Sentral ng Pilipinas
Staying in sovereign investments

Q What is your investment time-horizon and where do you see opportunities?
A The investment horizon of our investments is consistent with our mandate to ensure that the international reserves will be available to meet any foreseeable net demands on the BSP for foreign currencies. In terms of opportunities, we see scope to further diversify our foreign-currency investments. In particular, the Asian market is one potential asset class given the region’s growth and development.

Q Have there been discussions about setting up a separate entity, such as a sovereign wealth fund, to manage such assets?
A
The idea of setting up a so-called sovereign wealth fund was floated after the level of the gross international reserves grew. However, it is not being actively discussed today.  

Q What is the asset class composition of your portfolio and how has it evolved?
A
The bulk of the reserves (around 90%) continues to be invested in fixed income securities and money-market instruments, while the rest are in foreign exchange, gold, and special drawing rights [the latter being typical for IMF member countries]. Corporate bonds, equities, real estate and other alternative assets are outside the allowable investments of the bank.

Q How many external managers do you have?
A
We maintain a good number of external managers. There was also a study conducted before showing that different fund managers, even if asked to manage a portfolio against the same benchmark, will have different management styles. With more than eight, you start to lose some benefits of diversification. We used an award approach for allocating funds to various managers. We started them all off with the same seed amount, then we re-allocate funds based on performance. There were instances where we had to terminate a mandate due to underperformance. Funds from a terminated mandate can either be distributed to existing fund managers or awarded to new managers selected based on our criteria.

Q How much is managed externally?
A
The bank continues to outsource the management of a fair portion of the reserves to global asset managers. We may revisit our line-up and number of managers once monetary policies have normalised and we have exited this divergence cycle, which may have an impact on their performance.

Q How do you select managers?
A
First we ask for information before putting out an request for proposals. We look at their experience of managing the relevant type of mandate, and of managing money for a central bank for such a mandate. We would also look at their investment philosophy, style and processes, financial statements, turnover of portfolio managers – the usual things. Basically the criteria have stayed the same but, having learned from them, we ask more detailed questions.

Q Do you use mainly big well-known managers or boutiques too?
A
If you look at the survey of the top managers by AUM, our managers would be in the top 15, if not top five.

Q How do you manage duration in your fixed income portfolios?
A
Aside from the outright purchase and sale of bonds to manage the duration of the portfolio, we have also started to use futures to affect the interest rate sensitivity of the portfolio. In terms of the investment type, the bank is currently allowed to invest only in sovereign, quasi-sovereign and supranational issues.

Q What is your split between domestic and overseas assets, and has that changed?
A
Based on BSP’s end-2013 financial statements, local-currency financial assets represent less than 10% of the total financial assets of the bank.

Q Do you use investment consultants, and if so what for?
A
The bank does not hire consultants for investment strategies. But we do have a programme with an international financial institution, which helps to identify areas in our reserve and risk management processes that could be strengthened.

Q Do you have or would you consider overseas offices? What would they be for?
A
We do not have an overseas office, although we have noted that other central banks have overseas offices in key geographic locations to help in reserve management.

 

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