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Exploring reserve management strategies

Cover May 18#

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After declining gradually since 2014, central bank reserves have begun to recover. For the first time since OMFIF started tracking the assets under management of global public investors, central bank assets expanded, and did so at a pace of 8%. This trend was relatively broad-based: only Middle Eastern central banks’ assets declined on average.

Other types of public investors, sovereign funds and public pension funds, also increased their assets, according to this year’s Global Public Investor report. Norway’s Norges Bank Investment Management, the world’s largest sovereign fund, led the charge. OMFIF will be launching the full findings of this research on 23 May in London.

While reserves grow, the strategies for managing them are becoming trickier. Encouraged by a low bond yield environment, public investors are increasingly tempted to diversify away from traditional allocation strategies focused on fixed income and expand into a wider range of assets. There has been a particularly strong shift from sovereign funds and public pension funds into real estate and infrastructure assets, as documented in a report prepared by OMFIF and BNY Mellon, which will be launched next month.

Central banks, however, remain broadly conservative. Security and liquidity remain important criteria for defining reserve allocation strategies. While some of the factors influencing the macroeconomic landscape are slowly reversing, others are more structural. Weak demographics, slow productivity growth and persistently low long-term interest rates will continue to determine the overall framework within which public investors pursue their asset management strategies.

Key contributors include:

  • Joachim Wuermeling, executive board member at the Deutsche Bundesbank;
  • Gary Smith, member of the strategic relationship management team at Barings;
  • Mark Branson, chief executive officer of FINMA, the Swiss Financial Market Supervisory Authority;
  • Alexander Petrov, assistant vice-president, policy and research, official institutions group at State Street Global Advisors.

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