The Investment Account—Establishment

1. The Fund hereby establishes within the General Department an Investment Account as provided for in Article XII, Section 6(f)(i).

2. The assets of the Investment Account shall be kept separately from the other accounts of the General Department. (EBS/06/57, 4/17/06)

Decision No. 13710-(06/40) IA,

April 28, 2006

The Investment Account—Introducing Private Fixed Income in the Endowment Subaccount

The Rules and Regulations for the Investment Account, adopted under Decision No. 15314-(13/16), January 23, 2013, as amended, are further amended as set forth in the Annex I of SM/19/80. (SM/19/80, 04/10/19)

Decision No. 16507-(19/38), May 13, 2019

Annex I of SM/19/80

Rules and Regulations for the Investment Account

1. GENERAL PROVISIONS

Objective of The Investment Account

1. The objective of the Investment Account (IA) is to provide a vehicle for the investment of a part of the Fund’s assets so as to generate income that may be used to meet the expenses of conducting the business of the Fund. Achieving this objective would help diversify the sources and increase the level of the Fund’s income, thereby strengthening its finances over time.

Sources of Investment Account Assets

2. The IA may be funded with: (a) currencies transferred from the General Resources Account (GRA) in accordance with Article XII, Section 6(f)(ii) of the Articles; (b) the placement of profits from the sale of pre-Second Amendment gold in accordance with Article v, Section 12(g) of the Articles, in amounts up to the total amount of the Fund’s general and special reserves at the time of any decision authorizing such transfers; (c) the transfer of profits from the sale of post-Second Amendment gold in accordance with Article V, Section 12(k) of the Articles; and (d) income from the IA investment that is not transferred to the General Resources Account to meet the expenses of the Fund (Article XII, Section 6(f)(iv)).

Investment Account Subaccounts

3. The IA shall have a Fixed-Income Subaccount and an Endowment Subaccount, each of which has its own investment objective and shall be managed in accordance with Sections I and II, and I and III, respectively, of these Rules and Regulations (Rules).

4. Transfers of assets between subaccounts may be made with the approval of the Executive Board.

Responsibilities of The Managing Director

5. The Managing Director is responsible for implementing the investment policies set out in these Rules.

6. In carrying out the Managing Director’s responsibilities, the Managing Director shall (a) establish effective decision-making and oversight arrangements; (b) take the necessary measures, including the adoption of policies and procedures, that seek to avoid actual or perceived conflicts of interest; and (c) establish specific risk control measures and put in place mechanisms to monitor their observance by asset managers.

7. The Managing Director shall consult with the Executive Board regarding (a) the key conflict of interest policies and arrangements in the Managing Director’s responsibility referred to in paragraph 6; and (b) the key aspects of the investment strategy for the actively managed portion of the Endowment Subaccount referred to in paragraph 30 of these Rules.

8. The Managing Director shall provide annual reports to the Executive Board on the investment activities of the IA. Ad hoc reports shall be prepared as warranted by market or other developments.

External Asset Managers

9. All assets of the IA shall be managed by external asset managers, except that the Managing Director is authorized to manage: (a) investments in obligations of the Bank for International Settlements (BIS) and central bank deposits; and (b) other assets on an interim basis following the termination of an external asset manager and pending the transfer of the assets to another external asset manager.

10. The Managing Director shall only select external asset managers of the highest professional standards, and shall take into account their proven skills and track record suitable to achieve the investment objectives and to carry out the investment strategies set out under these Rules.

Custody Arrangements

11. The Managing Director shall establish adequate measures for the safekeeping and custody of the assets of the IA.

Use of Investment Account Income

12. The income from investment shall be invested, retained in the IA or used to meet the expenses of conducting the business of the Fund. The Fund shall decide on the use of the IA’s income for each financial year, including whether any portion of such income will be transferred to the GRA for use in meeting the expenses of conducting the business of the Fund.

Termination or Reduction of the Investment Account

13. The IA shall be terminated in the event of a liquidation of the Fund and may be terminated, or the amount of the investment may be reduced, prior to the liquidation of the Fund, by a 70 percent majority of the total voting power. The procedures specified in Article XII, Sections 6(f)(vii), (viii) and (ix) of the Articles will apply in the event of the termination of the IA or a reduction in its assets. The Fund’s decision to reduce investments in the IA shall specify the subaccount from which assets shall be used to fund a reduction in investments.

Audit

14. The assets of the IA shall be audited by the Fund’s external auditors and included in the Fund’s annual financial statements.

Review of the Rules and Conflict of Interest Policies

15. The Executive Board is expected to review these Rules and the Fund’s relevant conflict of interest policies every five years.

II. FIXED-INCOME SUBACCOUNT INVESTMENT OBJECTIVE

16. With a view of generating income while protecting the Fund’s balance sheet, the investment objective of the Fixed-Income Subaccount is to achieve investment returns in SDR terms that exceed the 3-month SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over an investment horizon of three to four years.

Asset Allocation And Tranches

17. (a) The Fixed-Income Subaccount shall consist of two tranches, a shorter-duration Tranche 1 and a longer-duration Tranche 2.

(b) Tranche 1 assets shall be managed actively against a 0-3 year government bond benchmark index, weighted to reflect the currency composition of the SDR basket. The Managing Director shall establish in the investment management agreements the permitted degree of active management against the benchmark. Eligible asset classes for Tranche 1 are Group 1 and Group 2 asset classes as defined in paragraph 18 below.

(c) Tranche 2 assets shall be managed according to a buy-and-hold investment approach against a 0-5 year government bond benchmark index, weighted to reflect the currency composition of the SDR basket, subject to subparagraph (e) below. Eligible asset classes for Tranche 2 are Group 1 assets as defined in paragraph 18 below.

(d) Asset transfers between Tranche 1 and Tranche 2, and the allocation to Tranche 1 and Tranche 2 of future inflows to, outflows from, the Fixed-Income Subaccount shall be determined by the Managing Director.

(e) The assets in Tranche 2 shall be phased over a five-year period, with the specific modalities of the phasing to be determined by the Managing Director. The phasing may be suspended or extended up to one year in case of exceptional market conditions.

Eligible Investments

18. (a) “Group 1 asset classes” shall be limited to:

• i. debt obligations issued by national governments of members or their central banks;

• ii. debt obligations issued by national agencies of the members whose currencies are in the SDR basket;

• iii. debt obligations issued by international financial institutions; and

• iv. obligations issued by the BIS, including without limitation deposits with the BIS and MTIs; all of which shall be denominated in SDR or the currencies included in the SDR basket.

(b) “Group 2 asset classes” shall be limited to:

• i. debt obligations issued by national governments of members or their central banks denominated in non-SDR currencies selected by the Managing Director or, upon the authorization by the Managing Director, by external managers, provided that any currency selection shall be based on ex-ante criteria determined by the Managing Director;

• ii. debt obligations denominated in SDR or the currencies included in the SDR basket, comprising: (A) securities issued by subnational governments;

• iii. (B) mortgage-backed and other asset-backed securities; (C) covered bonds; and (D) short-dated unsecured corporate bonds; and

• iv. cash-equivalent investments with maturities of one year or less, that are denominated in SDR or the currencies included in the SDR basket.

(c) The Managing Director shall establish the parameters for determining the eligible investments within the categories of the asset classes specified in this paragraph.

19. Up to the maximum 35 percent of the total value of the Fixed-Income Subaccount assets may be invested in Group 2 asset classes, and the breach of this limit shall require prompt action to bring the Fixed-Income Subaccount back within the established limit.

20. In addition to investing in Groups 1 and 2 asset classes, the Fixed-Income Subaccount may temporarily hold uninvested cash balances, including in short-term instruments of the custodian(s).

Minimum Credit Rating

21. Except for obligations of the BIS, central bank deposits and uninvested cash balances, all assets in which the Fixed-Income Subaccount invests must have a credit rating equivalent to at least A (based on Standard & Poor’s long-term rating scale) by a major credit rating agency at the time of acquisition. The Managing Director may establish higher credit ratings for eligible individual asset classes.

22. In cases where an asset is not directly rated, the Managing Director may determine whether a credit rating may be inferred for such asset in a manner that is consistent with market practice.

Divestment

23. Any eligible investment that ceases to meet the rating threshold under paragraph 21 or otherwise becomes ineligible after acquisition shall be divested within three months, except that corporate bonds which fail to meet the rating threshold under paragraph 21 after acquisition may be divested or continue to be retained in accordance with modalities established by the Managing Director.

Limits On Investment Activities

24. The Managing Director shall establish adequate safeguards against short selling and financial leverage.

25. The exchange rate risk for eligible investments denominated in non-SDR currencies shall be hedged back into SDR basket currencies with the objective to preserve the Fixed-Income Subaccount’s SDR basket composition. Currency hedging may be used for SDR basket replication or for achieving overall currency exposure in line with SDR basket.

26. Derivatives may be used for managing interest rate risk, currency hedging, or reducing costs in the context of portfolio balancing, benchmark replication, and market access.

III. ENDOWMENT SUBACCOUNT Investment Objective

27. The investment objective of the Endowment Subaccount is to achieve a long-term real return target of 3 percent in U.S. dollar terms. This is consistent with the objective of generating investment returns to contribute to the Fund’s income, while preserving the long-term real value of these resources. The subaccount’s real return shall be calculated by using the deflator that is used for purposes of the Fund’s administrative budget, the Global External Deflator (GED), provided that the U.S. consumer price index (U.S. CPI) component of the GED shall be adjusted to use the actual U.S. CPI instead of the projected U.S. CPI.

Strategic Asset Allocation And Investment Strategy

28. No less than 90 percent of the Endowment Subaccount assets shall be managed passively (the “passively managed portion”), with up to 10 percent of the Endowment Subaccount assets managed actively in accordance with paragraph 30 below (the “actively managed portion”).

29. The passively managed portion shall be invested pursuant to the following strategic asset allocation (SAA) benchmark: 15 percent in developed market sovereign bonds; 20 percent in U.S. Treasury Inflation-Protected Securities (US TIPs); 15 percent in developed market corporate bonds; 5 percent in emerging market bonds; 25 percent in developed market equities; 10 percent in emerging market equities; 5 percent in infrastructure debt; and 5 percent in real estate investment trusts (REITs). The Managing Director shall establish the parameters for determining eligible investments for the asset classes of the SAA and the modalities for appropriate passive investment approaches.

30. The actively managed portion may be invested only in the same asset classes as the SAA benchmark for the passively managed portion, with 60 percent in fixed-income instruments and 40 percent in equities (including REITs) and a permitted maximum deviation of ±15 percentage points for each category, but no specific allocation requirements for each asset class within these two categories. The Managing Director, in consultation with the Executive Board, shall determine the investment strategy and investment arrangements for the actively managed portion of the Endowment Subaccount, including the selection criteria and risk parameters for external managers, benchmark indices, the scope and instruments for currency hedging, the phasing of the actively managed portion of the Endowment Subaccount, policy bands and rebalancing procedures, and additional key measures to avoid actual or perceived conflicts of interest.

31. The asset allocation benchmarks for both the passively and actively managed portions shall not apply to uninvested cash balances, including such balances being held temporarily in short-term instruments of the custodian(s).

Rebalancing of the Passively Managed Portion

32. Based on modalities established by the Managing Director, the passively managed portion shall be rebalanced at least annually to minimize deviation from the SAA benchmark specified in paragraph 29 above, or more frequently in the event of significant deviation.

Minimum Credit Ratings

33. With the exception of obligations of the BIS, fixed-income assets in which the Endowment Subaccount invests are subject to the following minimum credit rating requirements at the time of acquisition by a major credit rating agency (based on Standard & Poor’s long-term rating scale): (a) BBB- for corporate bonds and infrastructure debt, provided that the Managing Director may establish modalities for allowing limited investment in infrastructure debt that is rated below BBB- at time of acquisition; and (b) BBB+ for remaining assets.

34. In cases where an asset is not directly rated, the Managing Director may determine whether a credit rating may be inferred for such asset in a manner that is consistent with market practice.

Divestment

35. Any eligible investment that ceases to meet the rating threshold under paragraph 33 or otherwise becomes ineligible after acquisition shall be divested within three months, except that corporate bonds and infrastructure debt which fail to meet the rating threshold under paragraph 33 after acquisition may be divested or continue to be retained in accordance with modalities established by the Managing Director.

Limits On Investment Activities

36. The Managing Director shall establish adequate safeguards against short selling and financial leverage.

37. The exchange rate risk for fixed-income securities denominated in developed market currencies vis-à-vis the U.S. dollar shall be hedged for the passively managed portion of the Endowment Subaccount. Currency hedging is not permitted for other assets of the passively managed portion of the Endowment Subaccount.

38. For the passively managed portion, derivatives may be used for managing interest rate risk, currency hedging operations required under paragraph 37, or reducing costs in the context of portfolio balancing, benchmark replication and market access.

39. For the actively managed portion, currency hedging and derivatives may be used as determined by the Managing Director subject to adequate risk control parameters.

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

The Acting Chair’s Summing Up—Broadening the Fund’s Investment Mandate—Additional Considerations, Executive Board Meeting 12/60, June 20, 2012

Executive Directors welcomed the opportunity to continue the discussion on implementing the Fund’s expanded investment authority through an endowment funded from the profits of limited gold sales. They broadly supported the proposed investment strategy and governance framework, and generally considered them adequate to reduce the main risks of actual or perceived conflicts of interest. Directors emphasized the need to move expeditiously to complete the remaining implementation issues this year.

Directors underscored that, given the Fund’s central role in promoting global financial stability, strong protection against actual or perceived conflicts of interest involving the Fund’s investment activities is critical. They agreed that the mitigating factors taken into account in the lead-up to approval of the new income model in 2008, including those identified in the context of an independent external review, remain valid to address conflicts of interest. In particular, Directors supported the proposed clear separation of responsibilities between the Executive Board, management, and external managers, as well as the exclusion of certain investment activities that by their very nature would be more susceptible to the appearance of conflict. They noted that the steps laid out in SM/12/111, including the outsourcing of specific investment decisions to external managers and the largely passive investment strategy, would further help prevent conflicts of interest.

Directors acknowledged that the 3 percent real return target, which had been endorsed by most Directors in the previous discussion, would be difficult to achieve in the near to medium term, given historically low yields on highly-rated government bonds. Nevertheless, and noting the long horizon of the endowment, most Directors considered it appropriate to retain long-term capital market assumptions to guide portfolio design, although a few were of the view that adopting a lower target for real return would be more prudent. Directors continued to support a strategic asset allocation along the lines of the “conservative diversified portfolio.” They noted that the return target and the strategic asset allocation could be revisited in the future, with a few calling for more frequent reviews than the envisaged 3-5 years. Differing views were expressed with respect to allocation across asset classes and geographical diversification based on risk-return considerations. On balance, however, most Directors considered that the proposed portfolio provides a reasonable basis for initiating the endowment, and could be adapted over time in light of experience and evolving market developments.

Directors agreed that the endowment’s investment program should be phased in over a sufficiently long period of time to mitigate the risk of short-term losses. With a view to building a cushion and preserving the real value of the endowment, Directors also saw merit in a conservative approach to payouts in the early stages of implementing the endowment, and looked forward to further staff work in this area. A number of Directors pointed to the possibility of delaying the initiation of payouts if warranted.

As regards implementation arrangements for the investment strategy, Directors agreed that the endowment should build on the current approach used for the Investment Account. They supported using external managers with a mandate to track widely available benchmarks or, where warranted, appropriately customized benchmarks. Most Directors also supported active management for a very limited portion of the portfolio in cases of clear opportunities to add value, noting that this could also facilitate the evolution of the Fund’s investment approach over time. While a few cautioned against taking such an approach at this stage, a few others saw scope for more active investment strategies. In order to ensure that the portfolio remains within the broad risk parameters to be adopted by the Board, Directors broadly supported a mechanistic, rules-based rebalancing of the portfolio to the strategic asset allocation. Most Directors supported the proposed policy bands that would trigger a portfolio rebalancing, although a few Directors preferred narrower bands and asked that staff revisit the width of the proposed bands.

Directors broadly supported the governance framework proposed in the staff paper, which builds on the current institutional arrangements. They agreed that the Board would continue to focus on strategic aspects of the Investment Account portfolios, determining their overall purpose, the strategic parameters for their operations, and reviewing regular financial reports for the Investment Account. With respect to the endowment portfolio, the Board would also determine its key strategic direction, including by setting its base currency and return target, strategic asset allocation and eligible and ineligible asset classes, and its spending policy. A few Directors called for greater Board engagement in the initial stages. A few Directors also saw merit in creating a Board-level committee to help the Board in the discharge of these duties.

Directors agreed that management would continue to have responsibility for implementing the strategy established by the Executive Board. Most also saw merit in management’s establishment of an Investment Oversight Committee, with day-to-day responsibility left to the Investment Unit in the Finance Department. Some Directors encouraged the Fund to draw from the experiences of the Investment Office, which manages the Staff Retirement Plan.

Directors looked forward to staff proposals on the remaining strategic implementation issues, including the base currency of the endowment, the scope for currency hedging, the phasing of initial investments, the payout policy, and a possible minimum credit rating threshold. These and other relevant considerations should be embedded expeditiously into a proposal for new Rules and Regulations for the expanded investment authority of the Investment Account.

BUFF/12/75

June 27, 2012

Use of Gold Sales Profits in the Investment Account

The Executive Board approves the exclusion of gold sales profits from the 1-3 year benchmark applied to the Investment Account, as set out in paragraph 16 of EBS/12/105 (8/7/2012). (EBS/12/105, 08/07/12)

Decision No. 15223-(12/82),

August 14, 2012