Selected Decisions and Selected Documents of the IMF, Fortieth Issue -- The Acting Chair’s Summing Up Review of the Investment Account, Executive Board Meeting 18/17, March 6, 2018

Prepared by the Legal Department of the IMF
As updated as of April 30, 2019

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ARTICLE XII, SECTION 6
Reserves, Distribution of Net Income, and Investment

The Acting Chair’s Summing Up Review of the Investment Account, Executive Board Meeting 18/17, March 6, 2018

Executive Directors welcomed the opportunity to review the experience with the Fund’s Investment Account, with a focus primarily on the Endowment Subaccount. Directors agreed with the proposed revisions to the Rules and Regulations for the Investment Account which they viewed as a gradual evolution aimed at improving the chances of achieving investment objectives over time.

Directors welcomed that the Endowment had been implemented successfully since its establishment in 2013 and that it had achieved its return objective. Looking ahead, they recognized the challenges facing the Endowment in meeting its 3 percent real return target over an extended time horizon, but cautioned against an excessive reach for yield to meet this target.

Against this background, Directors supported gradual refinements to the Endowment’s investment strategy, aimed at improving the portfolio’s risk-return tradeoffs. These refinements include a moderate reallocation from Developed Markets Sovereign to Developed Markets Corporate bonds, a reallocation of the Developed Markets Inflation-Linked bonds component entirely to US TIPS, and a reduction in the allocation to Emerging Markets bonds in favor of a corresponding increase in the allocation of Emerging Market equities. Directors also supported a rules-based approach for investing in corporate bonds as an alternative passive arrangement. In addition, Directors generally supported staff’s proposal to explore the potential feasibility and appropriateness of diversifying into private fixed-income investments, and looked forward to further consultation in the future before considering any decisions on such investments. A few Directors questioned whether the Fund is incorporating environmental, social and governance criteria sufficiently into its investment approach.

Directors welcomed the opportunity to discuss a framework for guiding future payouts from the Endowment. Directors generally agreed with staff’s proposal to follow an approach of a constant real US dollar payout, with safeguards to protect the real value of the Endowment. Most Directors supported delaying payouts for three years to build up a greater cushion of retained income in the Endowment. Directors looked forward to considering a specific proposal from staff when they meet to discuss the Fund’s income disposition in April. More generally, some Directors reiterated a call for a more holistic consideration of the various elements that affect the Fund’s income and financial position.

Directors supported the additional, delegation of a limited number of implementation measures to the Managing Director, in line with the guidelines for Trust assets. They agreed that this would enable a more efficient implementation of the Investment Account strategy while preserving the separation of responsibilities and the Board’s strategic oversight.

Directors welcomed the opportunity to review conflict of interest policies for the Investment Account. They were satisfied with the assessment by external counsel that the current framework had been effective and could also accommodate the proposed changes in the investment strategy. Directors noted the recommendations by external counsel to strengthen the role of the Designated Officer and to further enhance the Investment Oversight Committee’s processes related to the management of perceived conflicts of interest. They looked forward to timely updates on progress in this area.

Directors agreed to review the Rules and Regulations of the Investment Account and relevant conflict of interest policies in five years, or earlier if warranted by developments. Directors looked forward to the annual updates on the activities of the Investment Account, including on the exercise of the Managing Director’s delegated authorities. Many Directors asked staff to investigate the scope for more frequent updates to the Board.

SU/18/31,

March 9, 2018

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