The main features of the Economic and Social Stabilization Fund (ESSF)’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.
The ESSF’s current investment policy, based on the recommendations from the Financial Committee, came into force in August 2013, in order to improve the capacity to hedge fiscal revenues. However, in April 2020, this investment policy was modified by reducing the percentage of equities in the portfolio.
Investment objectives: In keeping with the ESSF’s objectives, the main aim of its investment policy is to maximize the fund’s accumulated value in order to partially cover cyclical reductions in fiscal revenues while maintaining a low level of risk. Its risk aversion is reflected by the choice of an investment portfolio with a high level of liquidity and low credit risk and volatility, thereby ensuring the availability of the resources to cover fiscal deficits and preventing significant losses in the fund’s value.
Strategic asset allocation: the current ESSF’s investment policy has the following strategic asset allocation: 35% in Money Market instruments (15.5% in Bank Deposits and 19.5% in Treasury Bills), 56.5% in Sovereign Bonds, 3.5% in Inflation-linked Sovereign Bonds and 5% in Equity. The currency makeup of the fixed income portfolio is: 41% USD, 25.75% Euro, 20.5% Japanese Yen and 7.75% Swiss Franc.
Benchmarks: a benchmark has been defined for each asset class:
|Benchmark||Percentage of Total Portfolio|
|Barclays Capital Global Treasury: US 7-10 yrs.||27.25%|
|Barclays Capital Global Treasury: Germany 7-10 yrs.||11.25%|
|Barclays Capital Global Treasury: Japan 7-10 yrs.||10.25%|
|Barclays Capital Global Treasury: Switzerland 5-10 yrs.||7.75%|
|Merrill Lynch Treasury Bills Index USD||6.0%|
|Merrill Lynch Treasury Bills Index EUR||7.25%|
|Merrill Lynch Treasury Bills Index JPY||6.25%|
|Merrill Lynch Libid 3 Month Average USD||5.25%|
|Merrill Lynch Libid 3 Month Average EUR||6.25%|
|Merrill Lynch Libid 3 Month Average JPY||4.0%|
|Inflation-Indexed Sovereign Bonds||3.5%|
|Barclays Capital Global Inflation-Linked: US TIPS 1-10 yrs.||2.5%|
|Barclays Capital Global Inflation-Linked: Germany 1-10 yrs.||1.0%|
|Total Fixed Income||95.0%|
|MSCI All Country World Index ex Chile||5.0%|
It is important to highlight that the fund has been invested with a passive strategy since May 2011. As a result, only minor deviations are allowed with respect to strategic asset allocation.
Management: The vast majority of the Economic and Social Stabilization Fund is managed by the Central Bank of Chile, which, as Fiscal Agent, is responsible for managing the fixed income portfolio (95% of total assets). In addition, there are two external managers - BlackRock and Bank of New York Mellon, which were delegated the administration of the equity portfolio.
Tracking error ex-ante: There is a 50 basis point limit for the tracking error ex-ante for the fixed income portfolio and a 60 basis point limit for the equity portfolio.
Eligible currencies and issuers: the only eligible currencies are those from the corresponding benchmark. The sovereign and equity exposure is only to issuers included in the benchmark. Eligible banks must have a credit rating better than or equal to A- from at least two of the following credit rating agencies (S&P, Moody’s and Fitch). Investment guidelines define the exposure to each issuer.
Eligible investments: investment guidelines provide a detailed description of eligible investments for the Economic and Social Stabilization Fund.
Leverage and derivatives: Leverage is not allowed in the fund. The use of derivatives is restricted to:
- Fixed Income portfolio: forwards and swaps are allowed only for currency hedging purposes. The notional amount of the derivatives cannot exceed 4% of the fixed income portfolio.
- Equity portfolio: forwards and swaps are allowed only for currency hedging purposes. In addition, the use of futures is allowed only for hedging purposes or for gaining exposure to some part of the benchmark. The aggregated nominal value of futures, forwards and swaps cannot exceed 10% of the corresponding portfolio for each manager.
Investment guidelines: The investment guidelines, which are available in this section, provide additional information about the investment policy of the Economic and Social Stabilization Fund, such as the rebalancing policy, deviation ranges, and other important issues concerning the fund’s management.