More on sovereign wealth funds
Chile is on the verge of implementing a new, less conservative investment programme for its two reserve funds.
In the next month, the ministry of finance is expected to select international consultants that will advise on the investment strategies for the reserve funds, whose income derives from copper sales. Callan Associates, Mercer, Russell Investment Group, Strategic Investment Solutions, Towers Perrin and Wilshire Consulting are the six firms competing for the role.
"We are starting to look for higher returns from our funds," says Eric Parrado, international finance coordinator at the ministry of finance in Chile. "Now, with outsourcing the management of the equity and corporate bond portion of these funds, we are taking the first steps towards optimal asset allocation with a longer investment horizon than our central bank international reserves."
In the past 12 months, in line with rapid growth in copper prices, Chile’s funds have grown to $17 billion from about $3.5 billion. This has encouraged the ministry to explore new investment strategies and move away from traditional central bank investments in liquid, short-duration, high-grade securities required for immediate economic stabilization. So far, the Chileans have outlined plans to move all funds into non-peso investments, with up to 15% going into equities and a further 20% into corporate bonds.
Overseas investment is a necessity. The strategy will reduce pressure on domestic inflation rates and local-currency appreciation. But caution will be the watchword. "Chile has a natural long position in copper and its trading currency, the US dollar. They would do well to take this into consideration in the process of framing an investment policy," says Juan Buendia, a managing director at BlackRock, which manages and advises sovereign wealth funds.
New funds, new targets
Chile’s Copper Stabilization Fund (CSF) was created in 1985 to plug gaps in the budget when the copper price falls below projections. In early 2007, the Bachelet administration passed a new Fiscal Responsibility Law to manage the growing surplus with greater flexibility than the CSF has allowed. Under the new law, the Fund of Economic and Social Stabilization (FESS) replaced the CSF. The Pension Reserve Fund was also created. In addition, new transfer rules were established.
Instead of aiming for a target of 1% fiscal surplus, based on medium-term oil prices and GDP growth, the government now aims for a surplus of 0.5% of GDP. Anything over this target is first transferred to the pension fund (between 0.2% and 0.5%), and then, if there are further excesses, these are shared between the FESS and the central bank for recapitalization purposes.
Another move that will make Chile’s funds stand out from others in the Middle East and Asia is its policy of transparency and governance. As in Norway, which has a transparent oil wealth fund, the Chilean ministry sees the copper revenues as the public’s money, and so in turn citizens have a right to know what is happening. "I think the Chileans are going about it the right way," says Buendia. The Norwegian fund is also continually expanding its investment universe to look at new assets – real estate and private equity are under discussion at the moment. Both of these investment routes are likely to appear on Chile’s agenda shortly.