Feature – Real assets
Since introducing equities to its portfolio in 2005, it has booked an average annual CHF-denominated return of 4.5%, compared to 0.9% on bonds over the same period. Since 2015, the central bank has also exercised its voting rights, focussing on European large-and mid-caps. It has delegated part of its shareholder engagement to external providers, with good governance being an important focus point of its ESG policies.
Tokyo story
The equity purchases by the Bank of Japan are even more bold. Having already launched new credit facilities in March, the bank’s governor Haruhiko Kuroda also announced a doubling of share purchases to ¥12trn (£88.3bn). By upping its share purchases, the bank hopes to boost corporate financing condi- tions and stabilise financial markets. But critics quoted in the Financial Times point out that these measures reflect a distinct lack of alternatives by a bank which has pursued monetary easing for more than a decade. Interest rates have been around zero and even negative during the past 10 years. This decision suggested that the bank had reached the limits of its monetary policies, critics point out. The Japanese central bank started its first “temporary” share purchases in 2010. As a result of this decade long shopping spree, the BOJ’s equity ETF portfolio now amounts to $372bn (£294bn), overtaking GPIF, the Japanese public sector pen- sion fund, as the largest investor in domestic equities. By the end of last year, the Bank of Japan was among the top 10 shareholders for almost half of all Tokyo-listed businesses. The decision to double the share purchasing programme appears rather desperate, but we do not know what would happen to financial markets without these share purchases. Smaller central banks are also invested in equities. This includes the Bank of Israel, which has held stocks since 2012 to control its exchange reserves and as an alternative easing meas- ure to already low interest rates. Just last year, the Israeli central bank raised its annual Condi- tional Value at Risk Index to 475 basis points from 400, which increased the maximum equity allocation to 17.5%, up from 15%. In 2018, some 13% of the portfolio was invested in equi- ties. But in the first quarter of 2020, this asset allocation has been challenging. Andrew Abir, deputy governor of the Bank of Israel, braved the press explaining: “I emphasise that the investments by the Bank of Israel in the reserves portfolio are for the long term and that all investment decisions are made with at least a two- year outlook.” By the end of 2019, the bank held $126m (£102.5m) in currency reserves, aided by an investment perfor- mance of 6%.
One particularity of the Israeli investment strategy is that it 40 | portfolio institutional July 2020 | issue 94
Even if the European Central Bank would only buy stocks indirectly, Krämer points out it would nevertheless send shivers down the spine of any observer with a degree of regulatory awareness
involves an actively managed component, which has been lucrative. For the past five years, the central bank has beaten the benchmark by 1.65% and last year it exceeded it by 4.5%, largely due to its equity investments.
Meanwhile, in Europe
The Czech national bank is also invested in equities. In 2018, Ceská Národní Banka handed over the management of no less than 10% of its reserves to BlackRock and State Street Global Advisors. Two thirds are invested with European firms, the reminder in US, British, Japanese, Canadian and Australian stocks, in line with global investment performance standards. Its Slovakian counterpart, Národná banka Slovenska, also ven- tured into stock market investing for the first time in 2018. It is invested in a global equity portfolio managed on a passive basis.
The Czech central bank invests its exchange reserves to sup- port independent monetary policy decision making and as a source of foreign currency liquidity for its clients. In contrast, the Danish central bank describes interventions in currency markets to stabilise the fixed exchange rate of the Danish Krona as the main reason for its foreign exchange reserve management.
It also aims to book the highest possible return at the lowest
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