Commodity Savings Funds: Asset allocation and spending rules Libreville, Gabon March 28-30, 2008 Stéphane Piot, CFA Lead F...
Road Map <ul><li>Commodity funds </li></ul><ul><ul><li>Challenges of managing commodity revenues </li></ul></ul><ul><ul><l...
Several countries have setup oil funds to avoid oil curse <ul><li>A number of countries have adopted the use of oil or com...
Commodity savings and heritage funds <ul><li>Generate long-term wealth for future generations (by converting non-renewable...
Examples of savings & stabilization funds Source: Morgan Stanley, Wikipedia, and others Country AUM  (US$ bn) Inception Ye...
Important considerations in designing commodity funds <ul><li>Design of spending and savings rules </li></ul><ul><ul><li>I...
Sterilizing foreign currency inflows <ul><ul><ul><ul><ul><li>Revenue flow directly into fund would improve transparency an...
Creating permanent wealth by transferring commodity wealth into financial wealth <ul><li>The values are expressed in real ...
Risk habitat of Funds Central bank  Reserves &  Stabilization  funds Funds for the future Pension funds State owned enterp...
Strategic Asset allocation is critical
Expect Volatility
The path from oil to equities Data from 1983 to 2007 Graph is based on a speech by Knut Kjaer (Norges Bank Investment Mana...
Bonds and stocks do well when oil and gas prices are falling
Commodity fund design OBJECTIVE DESIGN Capital preservation for future spending  Saving rule, spending rule or guideline b...
Spending rules used by commodity savings & stabilization funds <ul><li>Common spending rules </li></ul><ul><ul><li>Bird-in...
Other rules used by commodity savings & stabilization funds <ul><li>Price-based savings rules </li></ul><ul><ul><li>save r...
<ul><li>Generic module for commodity savings funds </li></ul><ul><ul><li>Analytical framework that models revenues from bo...
Model objective: test robustness of fund design under uncertainty Model is also a fiscal planning tool for medium term pla...
Sovereign Commodity Fund Workbench
Institutional solutions for fund management <ul><li>Managed by Central Bank alongside reserves </li></ul><ul><ul><li>Not a...
Institutional characteristics for successful long term public wealth management <ul><li>Achieve political commitment to lo...
 
Upcoming SlideShare
Loading in …5
×

Les fonds des ressources naturelles et les politiques d'investissement, Stephan Piot, BM

1,359 views

Published on

International Oil and Gas Resource Management Seminar, April 27-30, 2008; held in Libreville, Gabon

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,359
On SlideShare
0
From Embeds
0
Number of Embeds
25
Actions
Shares
0
Downloads
18
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • Les fonds des ressources naturelles et les politiques d'investissement, Stephan Piot, BM

    1. 1. Commodity Savings Funds: Asset allocation and spending rules Libreville, Gabon March 28-30, 2008 Stéphane Piot, CFA Lead Financial Officer Sovereign Investments Partnerships World Bank Treasury
    2. 2. Road Map <ul><li>Commodity funds </li></ul><ul><ul><li>Challenges of managing commodity revenues </li></ul></ul><ul><ul><li>Advantages of stabilization & savings funds </li></ul></ul><ul><li>Important design questions </li></ul><ul><ul><li>Spending mechanism </li></ul></ul><ul><ul><li>Asset allocation </li></ul></ul><ul><ul><li>Fund management </li></ul></ul>
    3. 3. Several countries have setup oil funds to avoid oil curse <ul><li>A number of countries have adopted the use of oil or commodity funds </li></ul><ul><ul><li>Portion of government revenues from oil (and gas) or other commodities is saved </li></ul></ul><ul><ul><li>Fund rules separate oil revenues from budgetary spending (stabilizes impact of commodity revenues) </li></ul></ul><ul><ul><li>Allows for conversion of non-renewable resources into earning financial assets </li></ul></ul><ul><li>Typically funds have one of 2 (or both) purposes: </li></ul><ul><ul><li>Stabilize or dampen effect of oil revenues on fiscal budget </li></ul></ul><ul><ul><li>Savings for current & future generations to ensure intergenerational equity (oil and gas typically depleted in 20 to 50 years) </li></ul></ul>
    4. 4. Commodity savings and heritage funds <ul><li>Generate long-term wealth for future generations (by converting non-renewable resources into financial wealth) while meeting current income needs </li></ul><ul><ul><li>Set real target rate of return equal to spending rate </li></ul></ul><ul><ul><li>Minimize risk subject to achieving target rate of return </li></ul></ul><ul><li>Smooth fiscal expenditures (self-insurance) </li></ul><ul><ul><li>this objective should be achieved through setting a sensible spending policy </li></ul></ul><ul><li>Fund is usually kept outside domestic currency, government transfers will need to be made in domestic currency </li></ul><ul><li>Maintain international purchasing power of the fund </li></ul>
    5. 5. Examples of savings & stabilization funds Source: Morgan Stanley, Wikipedia, and others Country AUM (US$ bn) Inception Year Source Purpose Abu Dhabi 350 to 875 N/A Oil Saving Norway 350 1990 Oil Saving Kuwait 250 1960 Oil Saving Russia 160 2004 Oil Both Qatar 50 2000 Oil and gas Saving Alaska 40 1976 Oil Saving Kazakhstan 18 2000 Oil, gas, metals Both Alberta 16 1976 Oil Saving Chile 10 1985 Copper Both Botswana 7.5 1966 Diamonds Saving Timor-Leste 2 2005 Oil Saving Azerbaijan 2 1999 Oil Saving Trinidad & Tobago 2 2007 Oil & Gas Both
    6. 6. Important considerations in designing commodity funds <ul><li>Design of spending and savings rules </li></ul><ul><ul><li>Integrate fund in budget/fiscal policy </li></ul></ul><ul><ul><li>Ideally all revenues flow into the fund and government withdraws a portion annually to support budget </li></ul></ul><ul><ul><li>Spending rule can be designed to ensures stable income to the government </li></ul></ul><ul><li>Asset allocation </li></ul><ul><ul><li>Convert depleting asset into diversified portfolio to create financial wealth </li></ul></ul><ul><ul><li>Design an asset allocation that generates sufficient returns over the long-run </li></ul></ul><ul><ul><li>Keep bulk of the fund outside the domestic economy </li></ul></ul><ul><li>Management of the fund </li></ul><ul><ul><li>Central Bank, separate investment unit or separate agency </li></ul></ul><ul><ul><li>Internal management or external management </li></ul></ul>
    7. 7. Sterilizing foreign currency inflows <ul><ul><ul><ul><ul><li>Revenue flow directly into fund would improve transparency and simplify sterilization operations </li></ul></ul></ul></ul></ul>Budget: domestic investments Investment Income FUND Liquidity Investments Commodity revenues Finance Income
    8. 8. Creating permanent wealth by transferring commodity wealth into financial wealth <ul><li>The values are expressed in real terms (i.e. 2008 dollars) </li></ul><ul><li>Example for country with oil expected to last from 2007 to 2022 </li></ul><ul><li>Several oil-exporting countries are on a declining production path </li></ul><ul><li>They may only have one chance to ‘get it right’ </li></ul>
    9. 9. Risk habitat of Funds Central bank Reserves & Stabilization funds Funds for the future Pension funds State owned enterprises & government holding companies Money markets High grade fixed income Small, if any, allocation to corporate Global fixed income Global equity Hedge funds Real estate Commodities Strategic corporate stakes Russia Stabilization Fund Chilean Stabilization Fund Central Bank of Nigeria Central Bank of Algeria CB of Malaysia CB of Indonesia Temasek, Singapore Russia Pension Fund Chile Pension Reserve Fund Singapore GIC China Investment Corp Bank of Korea—KIC Norway Pension (Oil) Fund
    10. 10. Strategic Asset allocation is critical
    11. 11. Expect Volatility
    12. 12. The path from oil to equities Data from 1983 to 2007 Graph is based on a speech by Knut Kjaer (Norges Bank Investment Management) – “from oil to equities” <ul><li>Investing in a financial portfolio of stocks and bonds can reduce the risk of oil significantly while improve total income </li></ul>
    13. 13. Bonds and stocks do well when oil and gas prices are falling
    14. 14. Commodity fund design OBJECTIVE DESIGN Capital preservation for future spending Saving rule, spending rule or guideline based on total wealth that assures minimum annual income to government and meets future spending needs Meet current income needs Generating independent source of foreign currency income Investment in diversified portfolio of risk assets for return Smoothing of total foreign currency revenues Investment in financial assets with low or negative correlation to commodities Sterilizing foreign currency inflows Investment only in overseas assets Domestic investments flow through budget process
    15. 15. Spending rules used by commodity savings & stabilization funds <ul><li>Common spending rules </li></ul><ul><ul><li>Bird-in-hand rule: spending is equal to the expected real rate of return* times the market value of the fund </li></ul></ul><ul><ul><ul><li>Implemented in e.g. Norway and Alaska </li></ul></ul></ul><ul><ul><li>Total wealth rule: spending is equal to the expected real rate of return times the total wealth (= market value of the fund + oil in the ground) </li></ul></ul><ul><ul><ul><li>Implemented in East-Timor, Mauritania, Sao Tome </li></ul></ul></ul><ul><ul><li>Hybrid rule: in between bird-in-hand and total wealth rule </li></ul></ul><ul><ul><li>Mixed rule: in between bird-in-hand (or total wealth) and constant real spending </li></ul></ul><ul><ul><ul><li>Used by university endowment funds </li></ul></ul></ul><ul><ul><ul><ul><ul><li>* Expected real rate of return assumptions vary between 3% to 5% </li></ul></ul></ul></ul></ul>
    16. 16. Other rules used by commodity savings & stabilization funds <ul><li>Price-based savings rules </li></ul><ul><ul><li>save revenues in excess of budgeted revenues based on reference price for oil & gas </li></ul></ul><ul><ul><ul><li>Implemented in e.g. Russia and Oman </li></ul></ul></ul><ul><ul><li>Save revenues in excess of budgeted revenues (based on reference price) and can withdraw when falling short of budgeted revenues </li></ul></ul><ul><ul><ul><li>Implemented in Trinidad & Tobago and Chile </li></ul></ul></ul><ul><li>Macro-economic rules </li></ul><ul><ul><li>Target non-oil primary deficit to GDP (with or without debt reduction) </li></ul></ul><ul><ul><ul><li>Implemented in Norway </li></ul></ul></ul>
    17. 17. <ul><li>Generic module for commodity savings funds </li></ul><ul><ul><li>Analytical framework that models revenues from both hydrocarbons (or other commodities) and fund investments </li></ul></ul><ul><ul><li>Allow policy-makers and analysts to test the impact on revenues, fund size and spending amount over time of: </li></ul></ul><ul><ul><ul><li>Alternative spending/saving assumptions and/or </li></ul></ul></ul><ul><ul><ul><li>Alternative asset allocations </li></ul></ul></ul><ul><ul><li>Simulate uncertainty around oil and gas prices and capital market returns to assess risks to the fund </li></ul></ul>Commodity saving fund model Designed by Treasury’s asset allocation team to support policy makers in designing spending/saving rules and making asset allocation decisions
    18. 18. Model objective: test robustness of fund design under uncertainty Model is also a fiscal planning tool for medium term planning OBJECTIVES Fiscal budget requirements Capital preservation Future spending needs Fiscal smoothing TEST KEY DESIGN FEATURES SPENDING GUIDELINES STRATEGIC ASSET ALLOCATION RISK SCENARIOS <ul><li>OIL PRICE </li></ul><ul><li>stochastic </li></ul><ul><li>mean reverting </li></ul>INVESTMENT RETURNS CORRELATION Assumptions OUTCOMES Assess distribution of outcomes versus objectives Adjust rules if necessary Retest
    19. 19. Sovereign Commodity Fund Workbench
    20. 20. Institutional solutions for fund management <ul><li>Managed by Central Bank alongside reserves </li></ul><ul><ul><li>Not an ideal solution as many CBs typically manage assets conservatively </li></ul></ul><ul><li>Managed by Ministry of Finance (e.g. previous setup of Alberta Investment Management) </li></ul><ul><ul><li>Risk of politicization of fund management </li></ul></ul><ul><li>Separate investment unit in central bank (e.g. Norges Bank) </li></ul><ul><li>Separate investment agency with professional board (e.g. New Zealand Superannuation Fund, GIC, CPP, Australia FF) </li></ul><ul><li>Outsource management of a portion of the fund </li></ul><ul><ul><li>Investment management of unfamiliar assets / strategies </li></ul></ul><ul><ul><li>Risk management technology </li></ul></ul><ul><ul><li>DO NOT outsource ownership of risk </li></ul></ul>
    21. 21. Institutional characteristics for successful long term public wealth management <ul><li>Achieve political commitment to long-term objectives, articulated in a clearly defined legal mandate </li></ul><ul><li>Depoliticize the management of the funds </li></ul><ul><li>Ensure ownership of risk and return profile of the portfolio consistent with fund’s macro objectives at highest level </li></ul><ul><li>Create specialized institutional arrangements for the implementation of investment policy decisions within civil service budgetary, procurement and salary restrictions </li></ul><ul><li>Establish independent oversight and controls </li></ul><ul><li>Allow a high degree of transparency </li></ul>

    ×