Selected Decisions and Selected Documents of the IMF, Thirty- Sixth Issue -- The Acting Chair’s Summing Up— Broadening the Fund’s Investment Mandate—Further Considerations

Prepared by the Legal Department of the IMF
As updated as of December 31, 2011

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Reserves, Distribution of Net Income, and Investment
The Acting Chair’s Summing Up— Broadening the Fund’s Investment Mandate—Further Considerations
Executive Board Meeting 11/86, August 26, 2011

    Executive Directors welcomed the opportunity to continue the discussion on broadening the Fund’s investment mandate. With the Fund’s expanded investment authority now in place, they called for moving expeditiously to finalize the remaining issues concerning the design of the investment policy and governance framework for the gold-sale financed endowment so that it can be implemented as soon as possible.

    Directors agreed that the endowment should reflect the broad goals of providing a meaningful contribution to the Fund’s income and preserving the long-term real value of its resources. In this context, most Directors supported the adoption of a 3 percent real return target for the endowment. They recognized that achieving such a target could be challenging in the near term, given that yields on highly rated sovereign bonds are at or near historic lows, and called for keeping the target and associated risk-return tradeoffs under review. A few Directors preferred a more cautious approach to setting a return target, with greater attention to risk-return tradeoffs especially in the current environment. Many Directors considered it prudent to adopt a lower pay-out ratio in the initial years as a means of protecting the endowment, and a few asked staff to explore the scope for rules to link pay-outs to the Fund’s lending income. A few suggested supplementing the endowment with income windfalls from other Fund operations.

    Directors agreed that a diversified portfolio both geographically and across asset classes would be needed to generate a meaningful return while carefully managing risks. At the same time, Directors stressed that the investment policies for the endowment need to take into account the Fund’s mandate and acceptable levels of risk, particularly in light of the public nature of the funds to be invested.

    Most Directors expressed willingness to support an approach along the lines of the proposed “conservative diversified portfolio” consisting of high-grade bonds of mature and emerging markets, including inflation-linked instruments; a limited exposure to mature and emerging market equities; and possibly a small allocation to publicly traded real estate trusts. Recognizing that such an approach would imply foregoing the potential benefits afforded by broader diversification, many of these Directors were open to creating a structure that would allow the endowment to flexibly operate over time. A few Directors continued to prefer a portfolio confined to, or with a larger share of, fixed-income instruments.

    Directors took note of the extensive work on governance arrangements already done in the lead-up to the 2008 decisions on the new income model and of staff’s more recent work, including outreach efforts. They generally agreed that the broad conclusions of the earlier work remain valid, including the need to establish explicit investment performance objectives to promote accountability, a clear separation between operational and oversight responsibilities, and effective risk controls. Directors reaffirmed the view that the Executive Board should play a central role in the oversight of the endowment, including in determining broad investment policies. A number of Directors preferred to consider a governance structure contemporaneously with other decisions, including portfolio strategy, with a few seeking agreement on governance arrangements even before other decisions. A number of Directors considered that proposals on governance arrangements should await greater clarity on the investment strategy. Directors emphasized the importance of putting in place adequate safeguards against actual or perceived conflicts of interest. A number of Directors saw merit in drawing on the governance structure of the Fund’s Investment Office, including an investment committee similar to that for the Staff Retirement Plan (SRP). A number also saw scope for benefitting from the SRP’s experience and/or professional expertise.

    Overall, today’s discussion has been helpful in further clarifying views on the return target, broad investment strategy, and governance arrangements for the endowment. While some differences of views clearly remain, I propose that, as a next step, staff come back with more specific proposals on governance arrangements and an investment strategy, which preserves ultimate flexibility for the endowment, but which initially considers a strategy along the lines of the “conservative diversified portfolio” for further Board discussion.

September 14, 2011

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