Central banks tend to keep their reserves in cash and low-risk assets, such as sovereign bonds or money-market funds, and Bank Indonesia (BI) – with $91.79 billion in reserves as of October 31 – is no exception. It does, however, have an eye on other asset classes, including equities and corporate bonds.

Like the majority of institutions, BI went into ‘risk-off’ mode after the sub-prime crisis emerged in 2007, reducing its allocation to money-market assets and its use of derivatives, among other things. But it is looking to broaden and diversify its investments down the line.

“Whether we invest into equity products depends on our risk appetite – the volatility profile of equities is very different [from that of bonds], and it would have to fit with our capital-adequacy ratio,” says Giri Purnama*, senior portfolio manager at BI in Jakarta.

Only a few central banks trade in the stock market, he adds. “It all depends on risk appetite. But there will be a lot of chances to invest in equities in the future. So the opportunity is there, but I don’t think that decision is likely to come soon."

Corporate bonds could be another outlet if they are packaged to create a close risk profile with the central bank’s risk appetite, says Purnama, but BI would not invest in alternative investments such as hedge funds, private equity or real estate.

Moreover, given that many feel government bonds of so-called emerging countries in Asia and elsewhere are less risky than those issued by developed Western markets, what’s BI’s view on Asian sovereigns?

“Depending on the current environment and its prospect, we might put money in Asian government bonds selectively,” says Purnama, “and that would require some risk assessment of each country allocation.”

The central bank wants to give itself the opportunity to make higher returns, he adds, but any such moves will be made carefully.

"In line with current developments in the global market, we are always reviewing and conducting assessments about our strategy," says Purnama. "Our colleagues in other teams closely monitor market movements and counterparties’ risk intensively. If they feel the market is good and allows for a greater risk appetite, we make some adjustment."

BI is not the only central bank to have recently expressed support for the principles of portfolio diversification and broadening its investment strategy.

Speaking at AsianInvestor’s Southeast Asian Institutional Investment Forum in Kuala Lumpur in December, Bank Negara Malaysia's deputy governor, Muhammad Bin Ibrahim, spoke about the potential importance of moving into new asset classes.

Moreover, there should be a “rethinking on how reserves should be invested”, he says, given the accelerated pace of reserves accumulation in the past decade, a low-yield environment in the G7 economies and changing trends in trade patterns and currency regimes.

* See the February 2010 issue of AsianInvestor magazine for a full Q&A interview with Giri Purnama.