Asian central banks have been forced to consider changing their portfolio composition after a prolonged period of low interest rates amid developed market quantitative-easing programmes in response to the global financial crisis.
But reserve managers in Southeast Asia lack many of the financial instruments available to more risk-tolerant central banks, leaving them struggling to diversify their investments.
Bangko Sentral ng Pilipinas is only allowed to invest in government, agency and supranational bonds, and gets its exposure to regional debt both directly and through the Asian Bond Fund, which is managed and administered by the Bank for International Settlements.
Nevertheless there is an appreciation of the need for diversification at the Philippines' central bank.
In our second central bank interview (after Budianto at Bank Indonesia), AsianInvestor spoke to Maria Ramona Santiago, head of treasury at the Bangko Sentral ng Pilipinas.
Q: What is your investment horizon and where do you see opportunities?
A: The 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 reserves under management (around 90%) continues to be invested in fixed income securities and money-market instruments, while the rest is in foreign exchange, gold, and special drawing rights [the latter being typical for International Monetary Fund 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 employ?
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 a 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 large, well-known managers or boutiques as well?
A: If you look at the survey of the top managers by assets under management, our managers would be in the top 15, if not the 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 investment type, the bank is currently allowed to invest only in sovereign, quasi- sovereign and supranational issues.
Q: What is the split between domestic and overseas assets, and how has that changed?
A: Based on Bangko Sentral ng Pilipinas’ 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. However, we do have a programme with one 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.