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Investment Policy

The main features of the Pension Reserve Fund (PRF)’s investment policy are described in this section. In addition, the Ministry of Finance has decided to make the investment guidelines (in Spanish) available to the public since they provide information on the objectives, limits and risk parameters used by the Central Bank for fund management. The guidelines are prepared by the Ministry of Finance in coordination with the Financial Committee and are used by the Central Bank of Chile and external managers for managing the funds.

Investment objectives: the PRF’s principal objective is to generate resources to finance part of the fiscal pension liabilities. To this end, it has established the specific objective of maximizing the expected return subject to a risk tolerance defined as a 95% probability that, in a given year, it will not suffer a loss of more than 10% of its value in dollars. Given the size and timing of the liabilities it is designed to finance, the PRF has a medium to long-term investment horizon.

Strategic asset allocation: the current investment policy, implemented in January 2012, has the following asset allocation: 48% in nominal sovereign bonds, 17% in inflation indexed bonds, 15% in equity and 20% in corporate bonds. 

Benchmarks: a benchmark has been defined for the each asset class:

Asset ClassPercentage of the PortfolioBenchmarks
Sovereign and Government Related Bonds (a) 48% Barclays Capital Global Aggregate: Treasury Bond Index (unhedged)
Barclays Capital Global Aggregate: Governmen-Related (unhedged)
Inflation Indexed Sovereign Bonds (real) 17% Barclays Capital Global Inflation-Linked Index (unhedged)
Corporate Bonds 20% Barclays Capital Global Aggregate: Corporates Bond Index (unhedged)
Equity 15% MSCI All Country World Index ex Chile
 (a) Each sub-index of this asset class is weighted according to its relative capitalization size.

Management: sovereign and government related bonds, and indexed inflation linked bonds portfolios are managed directly by the Central Bank of Chile, as a Fiscal Agent. Equity and corporate bonds portfolios are externally managed by asset managers hired by the Central Bank of Chile. The external managers were selected through a bidding process carried out in 2011.

Tracking error ex ante limit: the limit for tracking error ex ante for the portfolio composed of sovereign and government related bonds, and indexed inflation bonds is 50 basis points. The limits for the equity and corporate bonds portfolios are 60 and 50 basis points, respectively.

Eligible currencies and issuers: only currencies and issuers included in the benchmarks are eligible for each asset class.

Eligible investments: the investment guidelines describe in detail the eligible investments in the Pension Reserve Fund.

Leverage and derivatives: Leveraged is not allowed. The use of derivatives is restricted to: 

  • Central Bank Portfolio: forwards and swaps are allowed only for currency hedging purposes. The notional amount of forwards or swaps engaged with a specific eligible counterparty cannot exceed 1% of the portfolio managed by the Central Bank. In addition, the aggregated notional amount of forwards or swaps cannot exceed 4% of the portfolio.
  • Equity and Corporate Bonds Portfolio: forwards and swaps are allowed only for currency hedging purposes. Futures contracts are allowed only for hedging purposes or for gaining exposure to some part of the benchmark. The notional amount of forwards or swaps that each manager engages with a specific eligible counterparty cannot exceed 1% of the portfolio managed by each manager. In addition, the aggregated notional amount of futures, forwards or swaps cannot exceed 10% of the portfolio for each manager.

Investment guidelines: The investment guidelines, which are available in this section, provide additional information about the investment policy of the Pension Reserve Fund, such as the rebalancing policy, deviation ranges, and other important issues concerning the fund’s management.
 

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