FC 109/5 |
| FC 109/5 |
Hundred and Ninth Session |
Rome, 9 - 13 May 2005 |
Report on Investments 2004 |
1. This document is submitted to the Finance Committee for information, in accordance with Financial Regulation IX, which provides, in part as follows: “The Director-General may invest monies not needed for immediate requirements seeking, wherever practicable, the advice of an Advisory Committee on Investments. At least once a year the Director-General shall include in the financial statements submitted to the Finance Committee a statement of the investments currently held.”
2. The long-term investment portfolio represents an accumulation in the value of securities and re-invested income over the last 30 years.
3. The principal objective of the portfolio is to fund the Organization’s share of staff-related liabilities:
4. Table 1 shows the evolution of the long-term investment portfolio since 1993 for both market and cost values compared to the actuarial valuations of the staff-related liabilities (from 1997).
5. An actuarial valuation of these liabilities has been performed each biennium since 1996-97. The last valuation as of 31 December 2003, carried out by a specialized firm, placed the Organization’s share of aggregate staff-related liabilities at US$ 432.7 million. Based on the assumptions used for the last valuation, the Organization’s staff-related liabilities were estimated to increase to US$ 452.5 million by 31 December 2005. However, this estimate did not include a forecast of currency rate variation and the strengthening of the euro relative to the US dollar during 2004 has had a significant impact on total liabilities, which are expressed in US dollars. Therefore, the value of the Organization’s staff-related liabilities at end-2005 is expected to be greater than previously estimated.
6. The budgetary appropriation for 2004-05 included an assessment on Member Nations of US$ 14.1 million representing additional funding towards the ASMC liability. However, in view of the shortages in operating cash experienced throughout most of 2004, the Organization postponed to a later date the transfer of assessed funds to the long-term portfolio. To date no additional assessed funds have been transferred to the long-term investments towards funding the Organization’s staff-related liabilities.
7. Until 31 July 2004, the investment guidelines for the long-term investment managers provided for a combination of instruments with a range allocation of:
Since 1 August 2004, following the results of the Asset and Liability Study, the guidelines were changed to maintain an equity to bond ratio of 50:50. The actual allocation at 31 December 2004 was as follows:
8. The measurement of performance is by comparison to the following benchmarks:
For the equity portfolio: The Morgan Stanley Capital International Inc All Country Index For the fixed income portfolio:
9. These benchmarks fairly represent the geographical and sector allocation of the portfolio and have been reviewed by the Investment Committee and by the Organization’s financial advisor, the World Bank.
10. Table 2 illustrates the evolution of the long-term investment portfolio in 2004.
11. The balances (in USD) in the long-term portfolio amounted to:
At 31 December 2003 |
At 31 December 2004 | |
Market Value |
185,577,144 |
216,362,540 |
Cost Value |
160,625,427 |
182,445,776 |
(Market and cost value include accrued interest as reported by the custodian, the Northern Trust Company)
12. Movements in the long-term portfolio during the year are summarized below:
Cash Flow 2004 |
Amount in USD | |
Market Value at 31/12/2003 |
185,577,144 | |
Net variance of unrealized gain |
8,965,047 | |
Income dividends and interest |
4,832,136 | |
Realized gain |
17,690,367 | |
Management, custodian & advisory fees |
-1,005,518 | |
|
Accrued income change |
303,364 |
Market Value at 31/12/2004 |
216,362,540 | |
13. (a) Yearly performance of the long-term portfolio:
|
Performance in 2004 | |
Overall Long Term Portfolio |
17.05% |
Benchmark |
16.52% |
Equities |
15.28% |
Benchmark |
15.25% |
Fixed Income (Jan - Jul 04) |
-1.38% |
Benchmark (expressed in USD) |
-1.78% |
Fixed Income (Aug - Dec 04) |
6.58% |
Benchmark (expressed in EUR) |
6.00% |
(b) Table 3 illustrates the return of the long-term fixed income portfolio since 31-7-04, when the portfolio was restructured (see paragraphs 27 and 33). The return is expressed in both USD and in EUR.
(c) Table 4 shows the annual net performance of the long-term portfolio and the benchmark return since 1994.
14. Table 5 provides a breakdown of the assets in the long-term fixed income portfolio by credit quality.
15. The following table provides a breakdown of the assets in the overall long-term portfolio by country of issuance at 31 December 2004 in accordance with minimum acceptable credit risk of the portfolio guidelines.
| Country | $
Amount |
% |
| Australia | 1,685,051 | 0.8% |
| Belgium | 365,509 | 0.2% |
| Canada | 2,497,483 | 1.2% |
| Denmark | 1,833,449 | 0.9% |
| Euroland Region | 19,243,744 | 8.9% |
| Finland | 921,308 | 0.4% |
| France | 81,652,423 | 37.7% |
| Germany | 15,419,648 | 7.1% |
| Hong Kong | 1,232,612 | 0.6% |
| Italy | 5,207,609 | 2.4% |
| Japan | 12,704,951 | 5.9% |
| Netherlands | 2,526,811 | 1.2% |
| Norway | 865,812 | 0.4% |
| Singapore | 406,630 | 0.2% |
| Spain | 1,378,796 | 0.6% |
| Sweden | 832,463 | 0.4% |
| Switzerland | 5,497,944 | 2.5% |
| United Kingdom | 8,750,993 | 4.0% |
| United States | 53,339,304 | 24.7% |
| Total Portfolio | $216,362,540 | 100.0% |
16. Reports with details on the securities held and the composition of the long-term portfolio at 31 December 2004 will be available during the session.
17. Short-term investments consist largely of Trust Fund deposits held pending disbursements on project implementation and cash representing the reserves of Regular Programme and other assets. The investments are managed by three specialized asset managers in short-term investments; Western Asset Management, Wellington Management and the Northern Trust Company.
18. Since 2003, FAO has placed a portion of its short-term investment holdings with the Bank for International Settlements (BIS), Basel.
19. The balances (in USD) in the short-term portfolios amounted to:
At 31 December 2004 | |
Western Asset Management |
72,095,740 |
Wellington Management |
71,835,985 |
NT Government Select Fund |
100,774,718 |
Bank for International Settlements |
161,503,101 |
Total |
406,209,545 |
20. Performance of the short-term portfolios in 2004:
Since |
Date of | |||
December |
1 Year |
Inception |
Inception | |
Western Asset Management |
0.24% |
2.00% |
2.21% |
31/08/02 |
Wellington Management |
0.18% |
1.52% |
1.88% |
31/08/02 |
Total |
0.21% |
1.76% |
2.01% |
|
Benchmark* |
0.18% |
1.30% |
1.39% |
*Benchmark = Merrill Lynch LIBOR 3 month Constant Maturity Index
Since |
Date of | |||
December |
1 Year |
Inception |
Inception | |
NT Government Select Fund |
0.16% |
1.21% |
1.21% |
31/12/03 |
Bank for International Settlements |
0.17% |
1.25% |
1.25% |
31/12/03 |
Total |
0.17% |
1.23% |
1.23% |
|
Benchmark* |
0.15% |
1.00% |
1.00% |
*The benchmark for Northern Trust and BIS investments is a notional one. However, for comparison purposes the portfolios are measured against the iMoneynet Govt and Agencies Instl Index. The benchmark is a simple average of 177 funds that may invest in US Treasuries, US Agencies, Repos or Government Backed floating rate notes.
21. Following the recommendations of the Advisory Committee on Investments in April 2004 to further reduce credit risk in the short-term portfolios, the maximum allowable proportion of Asset backed securities (ABS) and Mortgage backed securities (MBS) in the portfolio was reduced from 50% to 25% in each category, effective 1 May 2004.
22. Reports with details on the securities held and the composition of the Western and Wellington portfolios at 31 December 2004 and a description of the Northern Trust Government Select Fund will be available during the session.
23. The FAO Investment Committee reviewed the current investment guidelines for the short-term investment portfolios managed by Western Asset and Wellington Management and, considering that most of the investments relate to Trust Fund contributions, decided to further reduce the risk level of short-term investments by:
24. FAO Treasury subscribed to Performance Detail Analysis service, an investment monitoring tool provided by the Custodian. Reports containing customized performance measurements and asset class contribution to performance are now received and evaluated on a monthly and quarterly basis.
25. Compliance Analyst, another tool developed by the Custodian, was implemented to provide electronic alerts of any guideline violations by the investment managers. During the year, the Organization was able to identify losses associated with instances of transaction errors and recover the losses from the investment managers. The amount recovered in losses was more than double the yearly fee of the service.
26. A new service agreement was set-up with the World Bank, which now acts as the Organization’s external investment advisor.
27. The long-term portfolio was restructured to match the results of the Asset and Liability Study. The restructuring involved reducing the proportion of equities in the portfolio to 50%, converting the base currency of the fixed income portion of the portfolio from USD into EUR, and investing mainly in inflation-linked Euro Government Bonds.
28. During its 107th session, the Finance Committee requested that the secretariat provide some comparative information on the portfolio structures and performance of organizations with staff-related liabilities similar to those of FAO. The following points present comparative data compiled on such organizations. In addition, to gain a better overview, we have expanded the information to include pension funds, as the liabilities of pension funds are very similar in structure to FAO staff-related liabilities.
29. Table 7 illustrates the various asset allocation percentages prevalent in various countries for pension fund investments.
* Information provided by Hewitt Investment Group
|
Domestic Equities |
Domestic Bonds |
Foreign Equities |
Foreign Bonds |
Real Estate |
Cash/ Other |
Total Equity |
Belgium |
18% |
31% |
24% |
12% |
5% |
10% |
42% |
Denmark |
17% |
65% |
7% |
1% |
8% |
2% |
24% |
Finland |
9% |
69% |
1% |
1% |
7% |
13% |
10% |
France |
8% |
75% |
5% |
10% |
0% |
2% |
13% |
Germany |
6% |
71% |
3% |
4% |
13% |
3% |
9% |
Ireland |
24% |
26% |
33% |
4% |
6% |
7% |
57% |
Italy |
2% |
56% |
0% |
0% |
40% |
2% |
2% |
Japan |
29% |
40% |
19% |
8% |
0% |
4% |
48% |
Netherlands |
15% |
47% |
19% |
10% |
7% |
2% |
34% |
Norway |
13% |
60% |
6% |
6% |
7% |
8% |
19% |
Portugal |
14% |
72% |
4% |
1% |
2% |
7% |
18% |
Spain |
9% |
65% |
2% |
1% |
0% |
23% |
11% |
Sweden |
20% |
64% |
8% |
0% |
8% |
0% |
28% |
Switzerland |
10% |
25% |
22% |
7% |
16% |
20% |
32% |
UK |
53% |
9% |
22% |
6% |
2% |
8% |
75% |
USA |
56% |
26% |
10% |
1% |
2% |
5% |
66% |
30. During the 1990s, average equity exposure increased across the globe as more investors, driven partly by capital appreciation, turned to equities for higher real returns. Small programmes typically maintained a similar equity exposure but eliminated investments in more volatile (or less liquid) asset classes, including alternative asset classes such as Private Equity, Real Estate, Emerging Markets, etc.
31. Fiduciaries in the US and UK have allocated much larger amounts to equity as compared to Continental Europe and Japan. In most countries, foreign bonds, real estate and cash are not considered attractive investments. After domestic equity and fixed income, foreign equities are often considered the most attractive portfolio diversifier.
32. The most important drivers for the different asset allocation practices are often:
33. In 2003, FAO engaged a specialized firm, Hewitt Bacon & Woodrow, to carry out a detailed review of the FAO Assets and Liabilities. To best match its assets and liabilities, the Organization restructured the global fixed income portfolio into a euro-based fixed income portfolio with a main component of inflation linked bonds. At the same time, the overall exposure in global equities was reduced to 50%.
34. Table 8 shows the asset allocation practices of pension funds and organizations with staff liabilities comparable to the Organization’s own staff liabilities. All data provided relates to international organizations. The last two columns indicate each organization’s overall performance in 2003 and 2004. In general, 2004 performance figures are not yet audited.
Table 8
Asset Allocation & Performance Across Various International Organizations
Asset Allocation as a % of Market Value |
Performance | ||||||||||||
Equity |
Fixed-income |
Real estate |
Cash/short-term |
Other |
|||||||||
2003 |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
2004 | ||
A |
|||||||||||||
58.8% |
57.7% |
21.3% |
20.4% |
6.5% |
5.8% |
8.1% |
9.2% |
5.3% |
7% |
29.8% |
15.2% | ||
B |
|||||||||||||
58.8% |
62.5% |
29.2% |
25.7% |
6.2% |
5.5% |
5.8% |
6.3% |
- |
- |
24.8% |
13.7% | ||
C |
|||||||||||||
39% |
43% |
61% |
57% |
- |
- |
- |
- |
- |
- |
n/a |
7.5% | ||
D |
|||||||||||||
7% |
0% |
56% |
30% |
- |
- |
37% |
70% |
- |
- |
5% |
3.5% | ||
FAO |
|||||||||||||
|
67.3% |
48.2% |
31.1% |
48.5% |
- |
- |
1.5% |
3.3% |
- |
- |
27.2% |
17.0% | ||
35. Although the figures provide a good overview of the performance and current asset allocation practices of various international organizations, drawing summary conclusions, such as the 2003 best performer is Organization B while the highest performer in 2004 is FAO, should be avoided. Asset allocation is best compared and matched to the structure of the related liabilities. Similarly, overall performance is more meaningful when compared to the increase or decrease in the funded liabilities, as illustrated in Table 1 of this document.
36. The outstanding FAO performance in 2004 is due primarily to the strategic move of the fixed income portfolio from a global, mainly US dollar-based, portfolio, into a euro-based portfolio, as the euro strengthened considerably soon after the portfolio restructuring at the end of July 2004.
37. Table 9 shows the evolution of the EUR/USD exchange rate in 2004.
38. As mentioned previously in paragraph 5 of this document, the Organization’s total liabilities are also affected significantly by the same currency fluctuation.