Trends in reserve management: 2018 survey results

The survey questionnaire was sent to 130 central banks in February 2018. By the end of March, replies had been received from 79 reserve managers, responsible for a total of $5.5 trillion, or 54% of the world’s total, with gold valued at market prices as of August 2017. The average holding of respondents was just over $69 billion. Breakdowns of the respondents by geography and economic development can be found in the tables below.

Which in your view are the most significant risks facing reserve managers in 2018? (Please rank the following 1–5 with 1 being the most significant.)

Reserve managers see rising interest rates as the most significant risk they face in 2018, with overvalued asset markets and the unwinding of quantitative easing (QE) also of concern among significant minorities. Just over three-quarters of respondents thought that rising rates would be the primary or secondary risk facing the reserve management community, with 59% ranking it as the most significant. This group of 41 was dominated by emerging-market countries, which accounted for nearly half. Indeed, three-quarters of emerging market respondents, responsible for $2.7 trillion in reserves, saw this as the most significant risk. Among industrial country central banks, in contrast, only half saw it as most significant, and for developing country central banks the figure was less than half.

In their comments reserve managers stressed the impact rising rates would have on global markets broadly, the markets that they were active in, or, closer to home, their own portfolios. A reserve manager from Europe was concerned rate rises would spur volatility broadly: “Rising interest rates and the expectation of unwinding QE policies in Europe and Japan could be the most significant factors. The combination of those two factors will generate more volatility in asset markets.” A reserve manager from Asia, noted the hit on the profit and loss account that central banks could suffer as rising yields lead to mark-to-market losses: “Rising interest rates in United States possesses considerable risk to central banks having a substantial holding level in US Treasuries.” Another reserve manager from Asia was worried about potential deleterious effects on their holdings: “Rising interest rates and unwinding of QE will lead to higher yields and declined bond values which would have a detrimental impact on the central bank’s portfolio that is made up entirely of bonds.” A similar view was offered from a central bank in Africa: “Most of reserve managers with similar risk profile as us, invest in short part of the curve, in particular in US, where we do see a lot of pressure on the yields. If this scenario materializes it will hit the 2018 performance.”

Overvalued asset markets, which just under half of respondents ranked as first or second in significance, was a particular concern for reserve managers from industrial countries: five out of the 12 who saw this as most significant were from this group. Overall, one-third of the respondents from industrial countries saw this as the most significant, compared with 18% overall. One commented: “Risky assets valuation is a concern from a portfolio management perspective.” However, they were less concerned about QE: “Unwinding of QE should be gradual.” A reserve manager from an emerging market in Europe was worried about bubbles in markets, which was a result of QE: “Due to the QE implemented by central banks there are bubbles formed in different markets.”

The unwinding of QE was seen as the most significant risk by only a handful of respondents, but was the most popular choice for second place. No developing-country reserve manager saw this as the most significant, but several from transition countries did. For one, the promise of far-reaching impacts was the reason, as they explained: “The most significant risks in 2018 are the normalisation of the monetary policies in the United States and European Union (EU). Shifts in the monetary policies will lead to higher yields and revaluation of equity and other financial instruments.” Reserve managers from 26 central banks saw this as the second most significant risk. Emerging-market countries figured prominently in this group – accounting for 40% – but only a handful of central bankers from developing countries were of this view. A reserve manager from the Americas commented: “The unwinding of the current monetary policy is an event we are interested in.” Another was worried about the impact on their balance sheet: “Rising interest rates place pressure on capital. An untidy unwind of QE policies may drive interest rates up significantly in a short period which will undermine capital and produce negatives returns given the low yield environment.” A European reserve manager, chiefly concerned about rising rates, saw portents of a correction: “Due to the global excess liquidity many asset classes are massively overvalued. A correction in rates and the normalisation of central bank policies will put significant pressure on bond yields and risky assets.”

Political risks were seen as significant by 18 reserve managers – a quarter of respondents – who placed this option first or second in priority. Industrial and developing countries made up one-third each of this group. A central banker from Africa commented simply: “Political risks may bring uncertainty.” A reserve manager from the Americas thought rising rates would be the main concern but highlighted geopolitical risks: “We expect developed economies to raise interest rates in the short and medium term, however geopolitical issues as the ones with Korea and Russia could affect volatility in the markets.” Only a handful of respondents thought the prospect of an emerging market unwind would figure prominently in reserve managers’ minds, and over half gave this the lowest score in terms of significance.

What proportion of your central bank’s reserves portfolio are actively and passively managed?

Central bank reserve managers have embraced active management with over half of the survey respondents reporting that more than 50% of their portfolio was actively managed. Most are content with the balance between the two approaches, though just over a quarter of respondents said they were considering a change. The survey respondents have $3.5 trillion-worth of reserves under active management, while central banks where active management dominated were responsible for $3.7 trillion in reserves. Emerging-market countries figured prominently in this group with 16, and 12 industrial country central banks were more active than passive. However, only seven reserve managers from developing countries were in this group.

A European manager explained that income considerations had led the central bank to extend the remit of their active management: “Given the low yield environment there has been active management even in the asset-liability tranche in order to generate some excess return.” A reserve manager from the Americas noted the benefits this had brought: “Active management has been successful and it has helped enhance portfolio returns.” In contrast, developing-country central banks were well represented in the group of 30 central banks whose strategy was more passive than active with 11. These 30 central banks were responsible for $1.1 trillion reserves, while the 11 developed country central banks were responsible for $132 billion. Only eight emerging-market central bankers and six from industrial countries said that most of their reserves were passively managed. In their comments, several reserve managers indicated a likely shift towards active management. A reserve manager from the Middle East, whose reserves were almost all managed passively, said they were considering “Allocating a higher percentage to active management.” A small reserve holder from Europe was looking at adding a tactical level:

A central bank in the Americas whose active share was less than 5% said they were “gaining knowledge to increase active management on a portion of the portfolio.”

Has this changed in the past 2–3 years?

Are you considering any change to this in 2018–19?

Industrial country central banks could be considered the “most” active: 70% of respondents in this group of 19 had more than half of their assets under active management. The group was characterised by stability: only four of this group said this had changed in the past two to three years and only three said they were considering changing this. One reserve manager, from Europe, whose reserves were 90% actively managed said they were “Considering being active for the whole portfolio.”

Sixty per cent of emerging-market respondents, managing reserves worth $923 billion, said that more than half of their reserves were actively managed. Movement was more evident in this group with five reporting change in the past two to three years and eight, just under one third of the group, saying they were considering change in the future. A reserve manager from Europe said their new Australian dollar portfolio would be actively managed and one from Africa noted that “A new Strategic Asset Allocation is before the Board of Directors for approval.”

Among developing-country respondents, less than half – 37% – said their portfolios were more actively managed than passively managed. These seven central banks were responsible for $38 billion in reserves, whereas the 11 where passive management was dominant held just over $133 billion in reserves. The results for transition countries mirrored those of the survey overall, with just over half reporting a more active strategy. Four reserve managers said they were considering a change with one, from Europe, noting the move was part of a broader shift: “We plan to actively manage our FX reserves portfolios, but also increase the share of our investments into held-to-maturity instruments in order to insulate portfolios from increased interest rate risks.”

What is the current duration of your central bank’s reserves portfolio?

Has this changed in the past 2–3 years?

Reserve managers employ a range of duration with most concentrating at the shorter end. This has been an area of change notably among developing countries in the past two to three years. Of those anticipating a change in duration in 2018, the overriding theme was one of further shortening. A duration of one to two years is the most popular positioning for reserves portfolios. This figure was chosen by 24, just over one-third of respondents. The findings were normally distributed with the figures either side – six months to a year and two to three years – each selected by 20% of survey respondents. Emerging-market countries figured prominently in this group of 24 central banks, which were responsible for just over $1 trillion in reserves. Indeed, the choice of duration broadly followed economic classification. Central bank portfolios in emerging markets were concentrated around the survey average, but there was more of a tilt towards the longer durations (see table below), with a similar pattern in transition countries. Conversely, developing-country central bank portfolios are clustered at the shorter end with none reporting a duration of two to three years and only a handful beyond that. Reserves in industrial-country central banks are managed with a longer duration average, with six respondents giving the figure of two to three years and five respondents giving the durations either side.

Duration has been an area of considerable change among reserve managers in recent years as their strategies have been influenced by shifts in global monetary policies, notably the slowing and reversal of QE and the introduction of negative rates. Just over 40% of respondents said they had changed their duration, a group of central banks that was responsible for $812 billion in reserves. Developing-country central banks made up the largest group within the 31 who reported change. Indeed, this sector was split almost evenly with the narrowest of majorities just favouring no change. By contrast twice as many emerging-market and developing-country central banks said they had not changed their duration as they had made a change.

In comments, 12 of the 31 indicated they had reduced duration, typically citing rising or “improving” interest rates in the market. An Asian central banker explained why they had moved back along the curve: “With the expected rise in interest rates, duration has shifted lower.” A similar view was expressed by a reserve manager in the Americas, who specifically mentioned a return to shorter-term investments: “Due to better money markets’ interest rates, the central bank has reduced gradually investments in medium term.” An African central banker said they had “Shortened SAA [strategic asset allocation] duration in line with expectations of a tighter monetary policy.” A central bank in Europe noted that while they had reduced duration for the euro holdings, that for their dollar had remained constant. Several central bankers in Europe mentioned a reduction in duration as part of a programme over time.

In contrast ten respondents, said they had increased duration. A reserve manager from the Americas said that they had done so because rates were higher and so they could take more risk. In Europe, a move to increase duration over the past two to three years was due to negative rates on euro denominated instruments. A small reserve holder in Africa had increased duration to give their fund manager more flexibility.

Are you considering any change in duration in 2018–19?

Reserve managers see little prospect of change in duration in 2018–19 with only just over a quarter indicating they were considering a change. These 21 central banks were spread across the economic classification with the most – seven – drawn from emerging market countries. In comments, 15 of the 21 reserve managers indicated a direction for the change with a reduction in duration proving more popular by a factor of 2:1. Unsurprisingly, reserve managers were looking to manage the impending increase in interest rates and unwinding of QE. One reserve manager from the Americas explained: “We expect interest rates in the US to increase at a faster pace than the market is anticipating, as such we are looking to shorten the duration of our portfolio.” Among those considering increasing duration, comments typically mentioned that this would happen as markets allowed. For one reserve manager, from the Americas, this increase in duration would be the result of a structural change: “We are adopting a new SAA based on a factor risk approach that, considers the covariance between the reserves portfolio and the external shocks and will push our duration to a longer one, once implemented.”

Which factors are most significant in determining the currency allocation of the reserves portfolio? (Please rank 1–6 with 1 being the most significant)

The make-up of a central bank or its government’s liabilities are the most significant factors for central banks in determining the currency allocation of their reserves. Over half of respondents said this was either the most, or second most, significant. These 37 central banks were responsible for $1.3 trillion in reserves and were dominated by respondents from emerging-market and developing countries. Only three reserve managers from industrial countries said this was a significant factor. Indeed among emerging-market and developing-country respondents, over 40% in both groups said this was the most significant factor. However for emerging-market central bankers, intervention is of particular importance, attracting nearly 30% of responses, and imports less so. This was reversed in developing countries where nearly one-third of respondents cited imports as the most significant, with the currency of intervention the most important for 16%. Interestingly, 14% of emerging market-respondents said diversification was the most significant factor when determining the currency allocation. Not one central banker from the developing country group was of this view.

Among industrial-country respondents, the most significant factor is the currency of intervention: 72% of respondents marked this either first or second. The numeraire was the second most popular choice: one in five said it was the most significant factor and just over a third marked it second. Transition-country central banks also typically look to the currency of intervention first, but then imports second. Imports were not regarded as significant among the industrial country respondents: more than 60% marked this fifth or sixth. The liabilities of banking/financial sector was not seen as significant as only one respondent – from an industrial country – said this the most important factor. A reserve manager from an industrial country noted that the currency’s liquidity and that of the underlying asset markets were “very important” factors.

Do you use derivatives to manage this currency exposure?

Derivatives play an important role in central banks’ management of their currency exposure, with a significant minority of respondents saying they used these instruments. This group of 31 central banks was responsible for $1.8 trillion in reserves and was dominated by industrial and emerging market countries with 12 and 11 respondents respectively. These two groups of central banks were responsible for $1.1 trillion and $650 billion in reserves. Industrial countries indeed favoured the use of derivatives by a ratio of 2:1. Only five developing-country reserve managers said they used derivatives, whereas three times that number said they did not. Among emerging-market countries, a majority said they did not use derivatives though in their comments respondents did indicate this may change, as one, from Europe explained: “We are in the process of introducing FX and cross currency swaps.” This was echoed by a reserve manager from a developing country who said they planned to “reintroduce FX forwards in the near future.” Only three transition countries used derivatives, with nine saying they did not. In their comments, most respondents referred to using FX forwards and swaps, with some mention of non-deliverable forwards (NDFs) and options. A respondent from the Middle East noted they used forwards or swaps to either hedge currency exposure or create an exposure.

Do your central bank’s investment guidelines specify a minimum permissible credit rating for individual investments and counterparties?

In the main, central banks stipulate a high quality threshold for their investments, although a substantial minority allow investments of lower medium grade investment, ie below A-. The 32 central banks that insist on A- or above were responsible for $1.4 trillion in reserves and as a group were dominated by emerging-market and developing countries, that combined made up two-thirds of the group. Conversely the 30 central banks which allowed investments below A- were dominated by industrial and transition countries, which, in turn, made up two-thirds of this group.

Among emerging-market respondents almost two-thirds of the group insisted on ratings above A-. Developing countries are a little less flexible: 80% require better than A- and only one in five allow lower grade paper. Among industrial countries, however nearly 60% permit investments below A-, and two from this group said they used their own systems. Central banks in transition countries are the most flexible: three-quarters of this group said they would accept paper rated BBB+ or below. In their comments, several reserve managers noted that lower grades were only acceptable for specific issuer types, typically sovereigns or Eurozone sovereigns. A reserve manager from South America explained: “The minimum credit rating allowed is mostly A-. In the case of sovereign investments on the eurozone, a minimum of BBB- credit rating is permitted (subject to further approval).” For a reserve manager in the Middle East, BBB was the lowest but this was “constrained” and a reserve manager in Africa noted that BBB- was the minimum long term credit rating. A European central banker explained how they would react to a downgrade: “A- is min general level for investing. Exceptions: few Eurosystem countries with BBB rating is permissible; when A- is downgraded we can hold investment up to BBB-.” A reserve manager from an industrial country explained why they, in contrast to the majority of central banks in that economic category, insisted on higher rated paper: “As specified in the Statement of Investment Policy, to help achieve the objective of preserving capital value, an issuing entity must be deemed to have a credit rating of A- or higher to be eligible for investment.” In their comments, several respondents noted that while they insisted on A- or above for investments a lower rating was permissible for counterparties.

Has this changed in the past 2–3 years?

Minimum credit ratings have tended to remain unchanged in the past two to three years, but where there has been change it has typically been to lower the acceptable threshold. The group of 23 central banks that had changed their minimum rating was dominated by emerging-market and developing countries, with ten and seven respectively; only one industrial country reserve manager said they had made a change.

Comments from reserve managers stressed a need to increase the range of investments (or reduce concentration risk). A reserve manager from an emerging-market country was typical of the first view: “In 2017, the central bank changed the minimum permissible credit rating from AA- to BBB-, in order to increase portfolio investments.” This was echoed by a central banker from the Caribbean: “The Credit Rating in the Investment Policy and Guidelines were revised downwards in response to the market conditions and the need to identify adequate investments.” A central banker in Europe expressed the twin motives of concentration risk and return, saying they had the “Desire to address concentration risk connected with deteriorating credit rating of counterparties and search for yield led to lowering minimum acceptable rating.” A reserve manager from the Americas noted the lowering was a result of the needs of its balance sheet as well: “Due to internal rating assessments and balance sheet analyses in terms of risk and liquidity conditions, the minimum permissible rating has decreased a couple of notches in the past 2–3 years.” A reserve manager in Europe had made the change so that lower rated sovereigns in the Eurozone were no longer “exceptions”: “Previously, the lowest limit was A- with Italy and Spain as exceptions, nowadays it is corrected so that there is no exceptions.”

Do you use internal and/or external credit ratings?

Reserve managers rely on external ratings to determine eligibility for their investment universe, although increasingly they look to supplement these with internal ratings. Three-quarters of respondents managing reserves worth $1.93 trillion said they used only external credit ratings. Developing countries figured prominently in this group and indeed this option was chosen by 85% of respondents from this group. The shares of emerging-market and industrial respondents using external credit ratings agencies were below the average, but not significantly so, at 73% and 67% respectively. In their comments reserve managers noted which rating agencies were used or the process involved. “For credit valuation, the central bank uses the following agency ratings: Standard & Poor’s, Fitch Ratings, Moody’s and DBRS,” said a central banker from the Americas. A reserve manager from Africa explained their methodology: “We use the three main credit agencies and we do consider, as a rule, at least two out of three main credit agencies.” However, several noted other internal analysis that was performed and two mentioned that they were looking to develop internal ratings. A reserve manager from the Americas used internal analysis to identify the riskiest eligible assets: “We use external ratings but we use our own methodology to identify the riskiest issuers in our investment universe. Our methodology does not produce ratings.” A European reserve manager determined limits using their own calculations: “Eligible issuers and counterparties are selected based on external credit ratings. Only for limit setting purposes we produce ratings based on an internal score.” A respondent from an emerging-market central bank noted that eligibility was only the start of the process:

A reserve manager from Africa said there was a “Project underway to develop internal ratings using fundamental analysis.”

The 19 reserve managers who said they used a combination of internal and external ratings were responsible for $1.1 trillion. Only a few mentioned how long they had been using these: two since 2008, three started in 2012–13 and one in 2015. A reserve manager from the Americas explained the process his central bank follows: “The formal processes started about five years ago and involve internal committee up to the risk deputy governor, who ultimately deliberates on issues discussed within the committees. The internal model is derived from credit agencies models and incorporates some internally developed market metrics like alternative volatility calculations, momentum factors and liquidity aspects for the specific market whose counterparties are being assessed.” A European reserve manager follows quantitative and qualitative steps: “The first phase is quantitative and based on balance sheet ratios and market indicators. In a second step an in-depth qualitative financial analysis is performed.” A reserve manager from Asia Pacific said they were “in the process of building an internal credit rating model.” Another from Europe noted that a central bank’s capacity to “compete with leading rating agencies is limited.”

Do you use any of the following to enhance the performance of the reserves? (Please check as many as appropriate)

Reserve managers typically utilise a suite of financial instruments to enhance the performance of their portfolios. Sixty-seven central bankers, 86% of respondents, responsible for just over $4 trillion in reserves said they used at least one of the six tools listed, and 53 (68%) said they used two or more. This group of 53 was responsible for just over $3.4 trillion in reserves, and emerging-market and industrial countries being the most prominent in the group. Indeed, while 20 out of the 25 emerging-market reserve managers that took part in the survey said they used two or more financial tools, the corresponding figure for developing countries was only nine out of 22.

Reserve managers from industrial countries are among the most active. Sixteen, or 84% of these respondents, said they traded actively – with 68% engaging in repo transactions and 58% active in securities lending or swaps. Only four respondents said they lend gold. As regards emerging markets, 25 respondents said they used at least one instrument and 20 said they were engaged in active trading. Fourteen said they engaged in securities lending and seven in gold lending. In contrast less than half of the 22 developing country respondents said they were actively trading and only a handful were making use of the other instruments.

As regards coverage, active trading and securities lending were the most widely used: 31 central banks use both these and 61 use one or the other. Emerging-market central banks figured prominently among these 31 central banks, with 13 respondents from that sector and 11 from industrial countries. Twenty-five central banks engage in active trading and repo but 63 use one or the other. These 25 central banks were responsible for reserves worth $2.4 trillion and were made up of nearly half of industrial countries.

In terms of combinations, the most popular choice was three: 21 reserve managers chose a range of three options with active trading, securities lending and gold lending being the most popular combination. Over half of these 21 were from emerging-market countries and, in total, were responsible for reserves worth $1.3 trillion.

Fifteen reserve managers indicated they used four or more and three of these and, in extended comments, set out their approaches. A reserve manager from Europe made active use of securities lending and repo opportunities, but noted these had to be managed carefully:

A reserve manager from a transition country was looking to enhance performance through active trading, securities and gold lending, and FX related derivatives:

A reserve manager from the Americas noted their recent success with swaps but was holding back on tri-party repos:

Two reserve managers, from Africa and Europe respectively, noted that they had stopped securities-lending programmes, for quite different reasons however. In the first instance, a domestic downgrade had led to the programme being stopped: “We do have in place a securities lending program with our global custodian and we used to get some income to cover management fees, etc. Due to economic and financial crisis that the country faces (eg. the credit rating of our countries as substantial downgraded) the program was suspended.” For the second, it was more a matter of insufficient returns: “Securities lending was suspended last year though due to lack of returns given our portfolio characteristics and other constraints, related to increased costs of capital for the agent due to its exposure.”

Have you added (removed) any asset class to (from) your portfolio in the past 12–18 months?

Reserve managers are actively adding asset classes to their portfolios, although change in the past 12–18 months has been a minority activity. The 24 central bankers that said their central bank had added an asset class to their portfolio were dominated by emerging-market countries. There were 11 reserve managers from this sector, five from developing countries and four each from industrial and transition countries. These 24 reserve managers were responsible for $1.4 trillion in reserves.

Of the 24 reserve managers all but two detailed the new asset classes in their comments. The list exhibited no strong overall trend to one particular class or sector, demonstrating the varied nature of reserve management, but was indicative of a continued move towards exploration of new markets. One industrial country reserve manager said they had added real estate and exchange traded funds (ETFs). Another, from the Americas, said they had added: US Treasuries, agencies, corporates, supranationals and Treasury inflation-protected securities (TIPS). An Asian reserve manager noted they had started investing in “liquidity funds”. Four reserve managers mentioned corporates, with a reserve manager from Africa saying this was a “minimum exposure.” Four reserve managers mentioned derivatives being added, notably futures and swaps, with two expanding on the type and use. A reserve manager from an emerging market country “included interest rate futures investments in the international reserves”, while a transition country central bank “introduced futures on listed exchanges in 2017 and we now use them to hedge our interest rate risks.” In addition, four also mentioned inflation protected securities, notably TIPS, although interestingly one reserve manager from an emerging market said they had removed these. A reserve manager from Africa explained their approach in this regard: “Added a segregated inflation linked bond portfolio although ILBs [index-linked bonds] were always eligible instruments in all portfolios in prior years.”

Two reserve managers mentioned agency mortgage-backed securities (MBS) and the emerging markets were mentioned by two reserve managers with one adding renminbi fixed income in 2017. A reserve manager in Europe said they had just had covered bonds approved internally, but was finding the going tough: “Starting the investment is difficult though, due to current market constraints.” The three asset classes that were removed were TIPS and Australian government bonds.

Which factors restrict your ability to diversify the reserves portfolio?

Overwhelmingly, reserve managers feel restricted in their ability to diversify by their central bank’s investment guidelines or risk appetite. Almost all respondents who replied to this question listed this as a factor. Some way behind this stand out result sits reserve adequacy, technology and the central bank’s law as considerations among significant minorities. Just under one in three reserve managers are constrained by staff skills, but a lack of asset classes and counterparties are not, in the main, seen as hindrance to acquiring new assets. In their comments, several reserve managers explained the reasoning and the impact this had. One from an emerging market country said: “Primarily, the risk appetite is the main driver for the level of diversity in our asset classes. Technology restrictions are an issue in as much implementation deadline for new asset classes is considered too tight. Typically, implementation takes its due time and technology hurdles are smoothly overcome.” For a central bank in Europe: “the risk appetite of the institution is rather low as return is not the main objective of the reserves.” For a reserve manager in Africa, capital preservation was key: “The current investment guidelines restrict investment in more conservative traditional asset classes in line with the primary goal of capital maintenance.”

Behind these overall results were notable variations among country groups. In particular emerging market countries were much more concerned about the law (58%) than the group as a whole and adequacy was also more of a concern (46%). For developing countries, adequacy was much more significant (64%) and technology (59%) and staff (55%) were also important. In contrast to emerging-market countries, only 36% of developing country respondents said their law was holding them back from diversifying.

The 32 reserve managers who said that reserve adequacy constrained their diversification were responsible for $1.15 trillion in reserves and were dominated by developing and emerging market countries. The average holding was $32 billion, although this was skewed by the presence of one very large holder responsible for more than $400 billion. A central banker from an emerging-market country in the Americas summed up the dilemma facing their board: “Our level of international reserves is not high enough to promote more diversification and asset classes. Our board of directors would like to have more return but is not willing to take correspondent risk.” A relatively small reserve holder from Africa did not feel able to stretch to an investment tranche: “Our reserve levels are such we do not have an investment tranche and this limits the instruments we can invest in. Further we cannot invest in the stock market due to the level of our risk appetite.”

Technology was the next most common constraint with 30 central bankers indicating this. Developing country central banks were clearly the largest group here with 13, followed by nine emerging-market central banks. Interestingly, one-quarter of industrial-country central bankers felt constrained by technology. In contrast, the 29 central bankers who found their law a hindrance were dominated by emerging-market central banks, with 15. A reserve manager from the Americas bemoaned the fact that their law proscribed equity investment: “The current investment guidelines allow access to different currency and fixed income markets, however, the Central Bank Law prohibits the access to the equity market, which marginally limits the diversification capabilities of the portfolio. Given the conservative bias of the central bank, investments in new markets is usually done gradually.” In an extended comment, a central banker from a transition country was doing all they could despite the law:

Only eight reserve managers from developing countries were of this view. No industrial country reserve manager reported finding their law restrictive.

Twenty central bankers listed staff as a constraining factor, with developing countries making up over half of this group. Only six emerging market reserve managers said this was a factor with one noting it meant they had to look to external managers in certain cases: “The size of the staff in charge of the investment of international reserves has been little changed in relation to the accumulation of assets, which makes it difficult to invest in markets that require a specialized understanding or a deeper risk analysis, such as MBS and corporate bonds, which forces the central bank to access those markets through an external manager.”

Late 2017 saw the announcement of the “Network for Central Banks and Supervisors for Greening the Financial System”. Do you include ESG (Environmental, Social and Governance) criteria in your investment decision-making?

Environment, social and governance criteria are the preserve of a select few reserve managers, although this number will grow in the next one to two years. Only eight reserve managers said they actively used these criteria in their investment decision making. They included two large holders and were, as a group, responsible for $1.5 trillion in reserves. Interestingly, the group was spread across the four economic categories, with an emerging-market central banker noting that it was not generally applicable because of the assets they invest in: “We include ESG criteria in a very small part of our portfolio because it only applies to some corporate investments.” An Asian reserve manager said they had had “Restrictions against alcohol, gambling, entertainment, tobacco and weaponry sectors, amongst others, long before ESG became mainstream.” An industrial country central bank that invests in equities said there was an “Exclusion of issuers (stock and bonds) due to ESG-non compliance. Use of voting rights in our stock holdings.” A transition country central bank had “implemented internal rules for following major ESG criteria.”

Among the significant majority of respondents that said they did not include ESG criteria, several indicated a move towards inclusion in the near future. A European reserve manager was committed to this year, saying: “We plan to start with our first ESG mandate in 2018,” while another said they were “considering this.” Another industrial country was actively looking into it: “Nothing prevents us from buying green bonds but this is not an investment objective. Projects are under way to study how we could take environmental considerations into our reserves management.” This view was echoed by a reserve manager from an emerging market: “Despite not formally considering ESG criteria, we are fully aware of the recent developments in Green Finance and monitoring the possibilities for future investments.” In an extended comment, a reserve manager from a European emerging market set out their approach, noting the advantages of ESG funds:

For a reserve manager from the Asia-Pacific region, it was not relevant because of what they invest in: “The bank’s asset classes do not warrant an ESG criteria. However, this is something we monitor.” And for a reserve manager from a developing country, ESG was not yet hard-wired into the workings of the central bank: “This is a new development which the bank has not reflected in its governance framework.”

The IMF added the renminbi to the SDR in October 2016 with a weight of just below 11%. What percentage of global reserves do you think will be in the renminbi by:

Reserve managers are increasingly optimistic about the official sector investing in the renminbi. Typically, they envisage gradual growth, as markets open with reserve managers from developing country central banks, on average, the most optimistic. The average figure for global holdings at the end of 2018 was 6.1%, an increase on the 4.2% for the end of 2017 in last year’s survey. Reserve managers see the renminbi at 8.5% by the end of this decade, and at 15% by the end of the next. This share would see it at less than the euro’s current standing, but significantly more than the yen or sterling.

A significant number, 29 reserve managers, think China’s currency will account for 10–20% of reserves by 2020. The central bankers were responsible for reserves worth $570 billion and were drawn in the main from smaller developing and emerging market countries, though two large holders from Asia were of this view. This figure of 29 is more than double the equivalent in last year’s survey. Twenty-nine also envisage the renminbi will account for 10–20% of reserves by 2025. This group featured a number of larger holders and was responsible for just over $1 trillion. Fifteen reserve managers, just under 25% of respondents, think the renminbi’s share will be 20–30% in 2030, almost double the equivalent figure in the 2017 survey.²²These results are compared with the 2017 survey, however, respondent classifications differed.

As with last year’s survey, reserve managers from developing countries tended to be more optimistic with regards to the share. On average, they see 18% of global reserves invested in China’s currency by 2030, compared to an overall figure of 15%. In contrast, reserve managers from transition countries and emerging markets tend to be less so, with corresponding figures of 13.9% and 13.1% respectively. Reserve managers from industrial countries were just a shade more positive than the survey sample, expecting the renminbi to make up 15.2% of global reserves on average by the end of the next decade.

In their comments, reserve managers focused on the opening up of markets, the strength of the economy and the impact of official endorsement, such as the move into the SDR and investment by major central banks. A reserve manager from Africa said: “Most of the emerging countries (in particular the African ones), will increase their exposure to China to cover the risks related to the public debt liabilities”. A reserve manager from a developing country explained their reasoning for allocating a higher percentage to the renminbi:

For a central banker from a transition economy, access was the critical factor:

In comments, reserve managers repeatedly noted that growth in the allocation to the renminbi would be gradual. The reasons given for this centred around progress in market liberalisation, concern over government intervention and the traditionally circumspect central bank approach to new areas of investment. A central banker from the Americas set out the reasons for this incipient approach: “In our view, complete liberalisation of financial markets and exchange rate regime in China will be quite gradual. In addition, central banks are slow movers with regards to new markets. Thus, we think that the adoption of the renminbi as a reserve currency will entail a slow process.” A European reserve manager was of a similar view:

A central banker from Africa also said: “The inclusion of the renminbi (RMB) is likely to reinforce official reserve diversification inflows to the RMB as global central banks seek to re-align their Strategic Asset Allocations. However, this is expected to be a gradual process.” A central bank from the Middle East said: “It will take time for many asset managers to fully embrace RMB as one of their main reserve currencies. Issues like market breadth and corporate governance remains critical.” A respondent from Europe drew attention to the ECB’s recent announcement: “The ECB and Bundesbank announced plans for replacing a portion of dollar portfolio with CNY so definitely will increase initially but at which pace will continue it’s hardly known.”

What percentage of your reserves do you think will be in this currency by:

In contrast, reserve managers are less sanguine when it comes to investing their own reserves. The average allocation of own reserves were virtually identical to the figures from last year’s survey, with a continued trajectory climb of two percentage points per year. Indeed, while most reserve managers see overall holdings at 6.1% from 2018, fully 42 reserve managers see the renminbi at less than 2% of their own reserves. These reserve managers were responsible for $2.2 trillion with strong representations from industrial and transition countries.

Overall, the averages for the amounts allocated to own reserves are around half that for global investment. As well as lower averages, reserve managers’ thoughts on their own allocations displayed a greater range than their predictions for overall allocations. For 2020, 28% thought the renminbi would account for less than 1% of their own reserves, 23% thought 1–2% and 23% thought, 5–10%. By 2025, 22% think it will be 10–20% of their holdings, but 21% still think it will be less than 2%. By 2030, nine – 16% – think China’s currency will make up less than 2% of their reserves but 19 – one in three respondents – think it will make up 10–20% of their reserves. As with overall holdings, reserve managers from developing countries were the most optimistic: on average they think the renminbi will make up 9% of their reserves, whereas those from industrial and transition countries are more cautious at 6.6% and 5.6% respectively.

Reserve managers’ reservations could be grouped broadly into two categories: disinterest in the currency or concern for the risks involved. A reserve manager in the first category said: “We have no long or short term plans to invest in this currency.” Concern over risks was prominent in the mind of this reserve manager from the Americas:

In comments, many central bankers stressed concerns over foreign exchange movements and the proclivity of the Chinese government to intervene in the markets. A European reserve manager was worried about the former: “We do not contemplate any investments in renminbi in the near future because of FX risk. However, our attitude may change based on our perceived view on CNY implied FX volatility.” Government policy was the chief reason for this reserve manager from the Americas: “As long as the Chinese government keeps implementing capital control measures, we will be reluctant to add a substantial exposure to said currency. Our exposure to CNY/CNH will be a function of the level of liberalisation that the Chinese markets display.” Similar sentiment was felt by a reserve manager from Africa:

Which of the following best describes your stance regarding investing in renminbi (Please tick one box per column.)

Investing in the renminbi is a mainstream activity for reserve managers, who favour onshore markets by a factor of 2:1. Thirty-nine central bankers, responsible for $2.9 trillion in reserves, said they invest in the renminbi either onshore or offshore or both. This compares with last year’s survey when 37 said they were investing, or considering investing, in the currency. This group of 39 central bankers was dominated by developing countries with almost all the developing country respondents invested in the renminbi. In addition, 19 reserve managers said they were considering investing in China’s currency. Two-thirds of respondents investing now or considering investing now are emerging-market economies. Transition economies did not feature in this group. Nine respondents only said they invest both onshore and offshore, two-thirds of these were from emerging-market economies.

In their comments, reserve managers noted the benefits China’s currency brings to their portfolio and remarked on their experiences of (and hopes for) onshore and offshore markets. A reserve manager who fell in the first category said: “Onshore RMB offers good diversification and decorrelation from other asset classes”. In the Americas, a reserve manager maintains: “small exposures to both CNY (externally managed) and CNH as it provides diversification benefits to the portfolio”. The appeal of investing offshore was also felt by a reserve manager in Africa: “Offshore we do invest in time deposit and the experiences have been great. We do add some spread within our total returns to our exposure on CNH. The scenario is the same for onshore, where we invest in CIBM although, and here with more volatility within the portfolio (benchmark not easy to replicate the key risk drivers)”. A reserve manager from Africa, currently investing offshore, was looking forward to investing onshore once the paperwork was done: “After the approval of the RMB by the IMF within the SDR basket, the bank invested in the offshore market for its internally managed SDR portfolio. In the near future, the bank expects to be investing onshore following the approval of the necessary quota and documentations and also due to the expected better rates than offshore.”

In contrast, 24 reserve managers remained to be convinced and said they were not considering investing in the renminbi. However, for a proportion of this group, their comment related to a particular market and seven of these were in fact investing or considering investing in the renminbi. Removing these, reduces the number to 17. This group was largely made up of transition and industrial countries and was, due to the presence of one very large holder, responsible for $1.48 trillion in reserves. In a similar vein, while 18 said they had “no interest”, a number of these were investing or considering investing in one of the markets. Removing them, leaves a smaller group of 13, responsible for $280 billion, largely from developing or emerging market countries. Reserve managers have been dissuaded from investing in renminbi, in the main, due to technical, operational reasons. “It is still a difficult market from an operational perspective, unlike the rest of the markets in the portfolio. This reduces the interest to increase exposure in the market,” commented a reserve manager from the Americas. Similarly, a reserve manager from Europe who has no interest investing offshore said:

A reserve manager from Asia had been put off by a combination of market moves and a fall in their own reserve holdings: “Although the central bank previously considered investing in renminbi in 2015, devaluation of the renminbi and then declining of official reserves held results in postponing investment in renminbi.” A large reserve holder commented: “Security and liquidity will determine the choice of currency as well as its convertibility and its function for FX interventions.” Two central banks, from developing economies in Africa, are selling renminbi.

Which of the following asset classes appear a) more attractive or b) less attractive than 12 months ago (ie, February 2017)?

Against a backdrop of rising interest rates and the unwinding of quantitative easing, reserve managers see value in deposits and inflation-linked bonds.

Agencies and gold were also favoured, albeit only by a narrow majority, and there was solid support for higher grade sovereigns.

With the rise in interest rates, significant majorities thought inflation-linked bonds and deposits were more attractive than in 2017 indeed, their support had increased 10 and 15 percentage points, respectively, compared to last year’s survey. Forty-two central bankers, 76%, said inflation-linked bonds were better placed than a year ago. This group was responsible for almost $2 trillion of reserves and was dominated by respondents from emerging-market and developing countries, which made up two-thirds of the group. Concern over rising inflation, naturally enough, was main driver here. “Due to increased yield in the US, inflation linked bonds appear more attractive,” noted one reserve manager from an emerging market in Europe, and “inflation-linked bonds might be attractive in the medium-term horizon if inflation rises and central banks are slow to react to the increasing price pressures”, said a reserve manager from a transition country. A central banker from Africa said: “We do think that, currently, we would get extra premium if an asset manager gets exposure to the inflation-linked bonds.”

Similarly, deposits received significant support from reserve managers. Forty-one central bankers were disposed to this asset class. Emerging-market economies were especially drawn to this asset, accounting for half of the group, which as a whole was responsible for $1.4 trillion. Asian reserve managers were in the minority here; however, one commented: “Owing to rising interest rates, we find deposits to be more attractive relative to longer-term bonds.”

Gold, agencies and AA government bonds received support from over 50% of respondents, who viewed them as more attractive than a year ago. Twenty-four central bankers, responsible for holdings worth $892 billion, saw gold as better. Emerging-market respondents figured prominently, with nine among this group. Similarly, agencies received support from 28 central bankers, 56% of respondents. However, in contrast to gold, this area was dominated by reserve managers from the Americas and Asia. Over 50% of respondents indicated that high grade government bonds are attractive to them. This group consisted of one-third European central banks, one-third from the Americas and one-third from Africa. Once again, emerging-market and developing economies were in the majority. A reserve manager from a transition economy commented: “For AA and above rated government bonds, as the yields have risen from where they were a year ago they seem a bit more attractive.” A reserve manager responsible for almost $60 billion said: “The rise in interest rates has increased the attractiveness of G7 government bonds”. A European counterpart made a similar judgement: “Yield level has made some government bonds more attractive.”

Lower grade government bonds, on the other hand, received considerably less support. In both cases, the percentage of respondents who viewed the asset as less attractive increased by ten percentage points compared to last year’s survey. Sixty-four per cent of respondents said government bonds graded BBB were less attractive and 87% for sovereigns rated below this.

Corporate bonds and equities received less support in this year’s survey. Fifty-six per cent of respondents said higher grade bonds were less attractive. A reserve manager in Europe put this down to credit spreads: “Credit spreads are tight, especially corporate bonds credit spreads”. Equities were also under pressure with 72% of respondents seeing them as less attractive. According to a European reserve manager, equities are “due to underperform because of overvaluation”. However, one reserve manager did say: “Equities present a good diversification tool”.

Which of the following currencies appear a) more attractive or b) less attractive than 12 months ago (ie, February 2017)?

The renminbi and US dollar stand out in reserve managers’ eyes, with a strong majority of respondents seeing them as more attractive than a year ago. The euro also enjoys considerable support, albeit less than the dollar. Relatively few reserve managers see value in commodity currencies and there is little optimism for currencies from emerging markets. The 31 respondents, 74%, who favoured the renminbi were responsible for reserves worth just over $1 trillion and included 18 reserve managers who invested in the currency. This was an increase of 25% compared to last year’s survey. A reserve manager from a transition economy in Europe was positive on the renminbi, although this was tempered by concern over government policy. Their prediction for the currency was: “CNY may gain against the USD, as a result of the lower US dollar, but policy-makers in China will probably not allow a significant appreciation of the renminbi by relaxing some of the capital restriction.”

A lower proportion, but a higher absolute number was positively disposed towards the dollar. This group of 48 reserve managers was dominated by emerging market and developing countries responsible for reserves worth $1.8 trillion. Only half of respondents from industrial countries were in this group however. The prospect of rising interest rates, in particular, appealed to one reserve manager: “Anticipated higher interest rates have made the USD more attractive.” The stability of the currency was alluded to by a European central banker: “We think STG and USD are better long-term investments than most of the rest”. However, concern that interest rate rises had been priced in, together with fears of a trade war and political risk broadly, weigh on reserve managers’ views, and more of them deemed it less attractive than did so a year ago. The 19 respondents, responsible for $792 billion in reserves, were largely from emerging-markets. A reserve manager from the Americas captured this sentiment in their comment: “Currently we maintain a negative view on the US dollar, given that the monetary policy normalisation is already priced in the markets. Hence, the potential appreciation from that driver is limited.” Similarly, a central bank from Africa said:

A reserve manager from Europe said: “More bullish in USD a year ago than am now but do not have strong view on any of the pairs at the moment. Much depends on if the political risks materialise.” A reserve manager, responsible for a relatively small holding of reserves, gave this extended comment:

The 39 respondents who favoured the euro were responsible for $1.9 trillion in reserves. This figure is almost three times that of last year’s figure of 14. Just under half of respondents in the group were from emerging-market economies. A reserve manager from the Americas sounded an optimistic note on the economy: “We expect developed economies’ currencies to strengthen in 2018 due to a greater economic activity.” A European reserve manager drew attention to changing policy at the European Central Bank (ECB): “The

ECB is expected to officially end its QE stimulus programme in 2018 and begin monetary policy normalisation in 2019 which should provide support for the value of the euro.” Mirroring this change, the number of central bankers from 2017 who believe the currency is less attractive has halved. A significant majority were European reserve managers.

Reserve managers are increasingly positive on the yen. Twenty-four central banks, over double the figure from two years previously, view the Japanese yen as more attractive than a year before. This group was responsible for just over $1 trillion. A central banker from a transition economy drew attention to the Bank of Japan’s changing policy: “The Bank of Japan will slow down its QE programme, but still maintain low rates and push back against JPY strength by emphasising that accommodation could stay in place for longer.” For a reserve manager in the Americas, the Japanese yen is a tool to diversify their portfolio: “Monetary policies should start converging more compared to past events. Higher global growth and activity should lead investors to diversify further currency exposure, which have been concentrated on USD and other reserve currencies (JPY, CHF).”

Sterling also received more support compared to last year, with 47%. This was the view of emerging-market and developing economies, in particular, with only two industrial economies taking this stance. A reserve manager from a transition economy placed it in the same bracket as the dollar: “Rising rates in the US and UK made USD and GBP attractive investments.” However, 51% of respondents view the currency as less attractive, with many respondents holding Brexit accountable. Twenty-eight reserve managers, one-quarter from industrial economies, view the currency as less attractive. Three reserve managers specifically addressed the negative impact Brexit is having on the pound in their comments. A reserve manager from Asia said: “Uncertainty surrounding Brexit has reduced attractiveness of GBP”. In Europe, a central banker commented: “All the uncertainty surrounding Brexit is weighing down on the value of GBP.” An African reserve manager said: “For currencies such as GBP, there is dampened pessimism surrounding the potential outcome of the Brexit negotiation.”

So-called commodity currencies and those issued by Scandinavian central banks, which have been popular avenues for diversification at the margin, are seen as less appealing. The Australian dollar, Danish krone, New Zealand dollar, Norwegian krone and Swedish krona were seen as less attractive by majorities of respondents. In the cases of the Australian and Canadian dollars, these figures had increased by 20%. Reserve managers’ coolness towards commodity currencies was typified in this comment from a transition economy central banker, who described the domino effect of the Federal Reserve’s monetary policy: “Australian and New Zealand dollars are expected to depreciate as a result of the pace of monetary policy tightening of the Fed. The fate of other commodity currencies such as the Canadian dollar, the Norwegian and Swedish krone will depend on how commodity prices revert to levels seen in the previous years.”

There was little appetite among reserve managers for emerging-market currencies, with the Indian rupee, Korean won, Malaysian ringgit and Mexican peso all receiving over 60% for less attractive than a year ago.

Which view best describes your attitude to the following currencies? (Please tick one box per currency)

While commodity currencies enjoy strong support from reserve managers, there is little interest apparent beyond this, notably in emerging markets. Fifty-three per cent of respondents are investing in the Australian dollar. Half of these central banks were from emerging-markets, with one-third from Africa and Asia and another third from Europe. Reserve managers were particularly keen to invest in commodity currencies to diversify their portfolios. A reserve manager in the Americas gave this comment: “International reserves have been following a path of increasing diversification among a broad basket of selected currencies and should continue going forward.” A reserve manager from Africa gave this extended comment:

Thirty-one respondents, holding reserves worth $2 trillion, invest in the Canadian dollar and a further five are considering this. Developing and emerging-market economies equated to two-thirds of this group, with only nine from industrial economies and three transition.

Significantly less support was evident for the New Zealand dollar and Norwegian krone, nor the Swedish or Danish currencies. Each currency had between 15 and 20 central bankers either investing in them or considering investment, with emerging market central banker figuring prominently. A central banker from Europe who is investing in both the Danish krone and Swedish krona noted the benefits: “DKK and SEK hedged exposures are taken to exploit the FX basis, although these are mostly off benchmark positions. Investment opportunities in hard and local currencies have been closely monitored in emerging Asia.”

Among emerging markets, only the Korean won and Singapore dollar enjoyed support of any note. In both cases almost all the reserve managers were from developing or emerging-market countries, with only one being from an industrial country. Over 80% of respondents have no interest in investing in emerging-market currencies such as the Indian rupee, Indonesian rupiah, Korean won, Malaysian ringgit, Mexican peso, Thai baht or Turkish lira. Over half of this group were from emerging-market and developing economies. A European reserve manager captured this sentiment in an extended comment:

A central banker from the Americas said: “We do not expect to change our currency composition; however, we performed some studies over other currencies that could add value to the reserves.”

Which view best describes your attitude to the following? (Please tick one box per row, and if you answer “investing in” please give the percentage invested.)

Reserve managers continue to explore non-traditional investments to diversify their portfolios. Corporate bonds proved most popular, with just under half of respondents investing in the asset. This was a particularly popular option for future investment, with just under one-third saying they were considering investing or would consider it. There was also strong support for emerging market bonds and a burgeoning interest in green bonds among reserve managers.

Fifty-eight per cent of respondents are investing in, or considering investing in, corporate bonds. This group was dominated by emerging-market and developing economies, and was responsible for $2.2 trillion in reserves. This asset class was managed both internally and externally; as a reserve manager from the Middle East noted: “Corporate bonds are actively managed against Barclays indices and through internal and external managers.” A European reserve manager looked to funds: “In equities and corporate bonds we invest through ETFs”, and a reserve manager from Africa looked to external support: “We do invest corporates, via external management programmes.”

Several reserve managers made reference to corporate bonds in their comments, with regard to future investment. The majority of these countries were from emerging-market and transition economies. A reserve manager from the Americas indicated the central bank is considering such investment, and outlined the central bank’s plan:

Similarly, a central banker considering investing in corporate bonds noted: “We are exploring corporate bonds as a way to diversify however, due to high quality asset restrictions there are not too many options to implement this.

There was considerable interest in emerging-market bonds, but in the main as an asset for future investment. While just over a quarter of respondents were actively investing, a further 35% said they were considering or would consider investing in these. This latter group featured smaller reserve holders on average. The 20 reserve managers already investing, by contrast, were responsible for $1.5 trillion, and featured large holders from emerging-market and industrial countries. In their comments, reserve managers spoke of small, targeted investments, often drawing on particular market knowledge: “We invest 8% in short term (three month maximum maturity) Latin-American emerging market bonds, directly taking advantage from our geographical knowledge of the zone,” said a reserve manager from the Americas. Another reserve manager from the Americas noted: “In terms of emerging markets, we are only invested in a small portion of Chinese and South Korean government bonds through an external manager.” A reserve manager explained their strategy: “We are also investing in securities (Eurobonds) issued by emerging market governments with minimum investment grade and stable economic and financial fundamentals.”

Interest in equities is on the rise, with a slight increase in the number of reserve managers who would consider investing. Thirty-seven per cent of respondents are considering or would consider investing in equities. Over two-thirds of these were European central banks, one-fifth from industrial economies. A reserve manager from the Middle East said: “Equities are invested passively against broad MSCI indices and through external managers.” Three central bankers said that their ruling law prohibited investment in equities.

Green bonds represent an area of rapidly increasing interest. Thirty-seven per cent of reserve managers would consider investing in these bonds. This group of 25 featured nine respondents from emerging markets, seven from developing countries, five from industrial countries and four from transition economies. A European reserve manager said: “We invest and find some comfort in investing in financials and we monitor the green bonds issued by our eligible counterparties”. A central bank in the Americas said: “Investment in green bonds has been accomplished through investing in supranational institutions.” Three central banks commented that they do not view green bonds as a separate entity to corporate bonds.

Which of the following asset classes do you manage internally and/or externally at your central bank? (Please give the percentage of the asset holding managed internally or externally.)

Government bonds, gold and corporates are the standout assets for internal management. An overwhelming 71 respondents, responsible for $3.5 trillion in reserves, manage government bonds internally. One-third of this group internally manage more than 75% of their government bonds. Almost half of these respondents were from European central banks, with one-third from emerging-market economies and one-third from developing economies. A central bank from the Americas reasoned this was due to resourcing: “The central bank has decided to manage most of its resources internally, due to more skilled staff.” One central banker commented that internal management was a good approach for them however: “We would benefit from skills transfer from external asset managers.” Government bonds were also managed externally. Thirty-seven central banks manage this asset class externally, with 35 of these also managing the asset class externally. For half of these central banks, the percentage of government bonds managed externally was less than 50%.

The results showed that central bankers preferred to manage their gold internally. Thirty-seven central bankers, and one-third from industrial economies, with a total reserve holding worth of $2.7 trillion preferred this approach, but declined to comment. Corporates were also managed internally, according to 27 respondents responsible for reserve holdings worth $1.7 trillion. One-third of this group were from industrial economies, with seven central banks from developing economies and emerging-market economies respectively. A central banker from the Americas said: “In corporates, we are including short-term commercial bank positions.” A significant majority of those who invest, 23 respondents, manage their covered bonds internally, two-thirds of which were European reserve managers. A high proportion of those who invest in equities do so internally.

External managers are more often used by central banks to diversify their portfolio when exploring new and specialised asset classes. Agency MBS inflation-linked bonds were rated highly in this regard. Central bankers in Africa and the Americas specifically outsourced management of their agency MBS. A reserve manager from a transition economy said they hope to make this an internal process in the future:

Eighteen central banks, responsible for reserves worth $884 billion, externally manage inflation-linked bonds. One-third of this group were from the Americas, with half from emerging-market economies. A reserve manager in this category said: “We have a technical issue with inflation-linked bonds, when it will be solved, we will use for internal and external portfolios”. Central bankers were motivated to use external managers due to the advantages of sharing resources and the opportunities for diversifying portfolios they provide.

The benefits of external management were highlighted by several reserve managers in comments. These comments had three overarching themes: greater knowledge and experience of the market/asset classes, greater portfolio diversification and technological advantages. A reserve manager from the Americas typified this sentiment: “External managers program seeks to benchmark internal management, knowledge transfer and to add value to international reserves. These objectives have been successfully accomplished”. A central bank in the Americas fell in the second category: “External managers tend to have more diversified portfolios than internally managed portfolios”. In the Americas, a reserve manager said that the benefit of external management were technology transfer: “Our experience with external management reveals that the main benefit is technology transfer for investments in new asset classes”. A reserve manager from the Americas listed the benefits of external managers:

For asset classes you manage internally, please indicate how you gain exposure to them:

Reserve managers prefer direct ownership when managing assets internally, as opposed to ETFs or derivatives. All but a few assets had strong majorities for this option. Derivatives were the second preferred method, while ETFs scored particularly low in this category, although two reserve managers commented they are exploring this option for future exposure.

All emerging-market bonds are under direct ownership, along with ABS and covered bonds. Slightly behind this were inflation-linked bonds and gold. Eighty-seven per cent of respondents have direct ownership of their governments bonds. Seventy-three central bankers chose this option, ten of these in combination with derivatives. These ten were divided evenly between emerging-market and industrial economies. A reserve manager from Europe said: “The greater portion of the portfolio has been invested in government bonds and this has not changed in the recent few years.” In the Americas, a new development has taken place: “In government bonds, we have introduced the use of futures.” A European reserve manager noted they take an active role in all their asset management: “All of the asset classes that we manage internally have been acquired directly. Some of the new asset classes were initially introduced by our external manager and later on were added to our internally managed portfolio.”

Five asset classes gained exposure through all three methods, to varying degrees. Gold is managed under direct ownership by 36 reserve managers with reserve holdings worth $3.08 trillion, with one central bank using ETFs and three employing derivatives. Likewise, agency MBS was used by 75% for direct ownership, 17% for ETFs and 8% for derivatives, as were equities. Two-thirds of the direct ownership for gold group were from European central banks. “In gold reserves we use unallocated gold deposits as the main way of exposure” said one central banker. Twenty-eight central bankers – two-thirds from industrial economies – employ direct ownership to gain exposure to corporates. In the Americas, a reserve manager noted the responsibility lay with external managers: “Direct ownership of corporates have been allowed for external managers for close to 15 years.”

Ten central banks use derivatives for government bonds in conjunction with direct ownership. Of this group, 50% were from emerging-market economies and 50% from industrial economies. A central banker in the Americas noted that they had recently moved to derivatives: “We have become more active in the derivatives market in the last few years. In this time, we have begun operating in FX options, federal funds futures and government bond futures issued by Germany, France, and UK in addition to the US Treasury futures we already traded.” Thirteen central banks use derivatives for other asset classes, however they declined to comment.

ETFs are the preserve of a minority. In total, 12 central banks use these products, typically in combination with other methods. The 12 were mainly from emerging-market countries. The cost of ETFs was a concern for a European reserve manager responsible for $750 billion in reserves holdings: “ETF would be too expensive relative to internal management.” In the Americas, however, changes have been made to include ETFs as well as derivatives: “Main changes are related to strategic exposures using equity derivatives and mortgage exposures by means of ETFs”. A similar amendment had been made by another reserve manager in the same region: “We started including corporate exposure through ETF for our internal portfolio.”

Six central bankers made reference to a change in their approach in the last two to three years: “MBS were added one year ago.” In Africa, the change noted was to manage assets more actively: “With improvement in the staff capacity the bank has successfully implemented in internal bond portfolio as opposed to the external managed fund. More focus is given towards the move from internal passive to internal active management.” Six central banks said there had been no changes in their approach.

Have you noticed changes in the fees (amounts or format) charged by external managers and custodians in the past 2–3 years?

While not the dominant view, change has been readily observed by a significant minority of reserve managers. This was the case for 25 reserve managers, 39% of respondents, who were responsible for $1.28 trillion in reserves. Developing countries featured prominently in this group; indeed this group of countries was split almost evenly on their view. A majority of industrial countries said they had noticed changes in fees. These respondents tended to comment that the prices had gone down, while two reserve managers, from the Americas and Europe respectively, said fees had increased: “Custodian fees increased significantly.” On the other hand, a significant majority of reserve managers see no change in the fees charged by external managers and custodians in the past two to three years. Thirty-nine reserve managers, 61%, said there had been no change in fees. In particular, these reserve managers were from less developed economies. A reserve manager in Asia said: “There have not been any significant changes in fee amounts and format.”

How significant are fees in your decision whether to select a manager? (Please select one.)

Fees are important to central bankers when deciding on external managers, but not typically the deciding factor. A substantial majority, 79%, said fees were significant or very significant in their decision to employ an external manager. Two central banks said this was the deciding factor, while another two said it was insignificant in their decision-making process. For many, fees were significant but not the deciding factor. Experience of the market, knowledge and performance were of great importance to three reserve managers in particular. A reserve manager responsible for $26 billion in reserve holdings commented:

Similar sentiment was expressed by a reserve manager also in Europe: “Fees are a significant factor, but we attach more importance to advisory services, transfer of knowledge, training and capacity building services. Those criteria rank much higher on our external manager selection checklist relative to fees and performance”. A reserve manager in the Americas gave this extended comment:

In Africa, a reserve manager commented: “When selecting external manager fees should not be the only leading factor but also other factors like its credit ratings, client support, experience skills and past performance (historical) of the managers and their risk profiles. A reserve manager in the Americas said: “Final decision is based on a weighted average of several factors, including fees, past performance, governance, capacity among others.”

Do you see blockchain related technologies having an impact on reserve management in central banks broadly?

Blockchain-related technologies will impact reserve management – but in the future. The impact will be felt in processing and operations, rather than investable products. Forty-nine central bankers, 73%, said blockchain will affect reserve management in the long term. Notably, this was the view of more than three-quarters of developing country respondents. These 49 reserve managers included several large holders, and were responsible for $2.69 trillion in reserves. A common theme in reserve managers’ comments was the potential blockchain has to enhance processes and operations, notably on the settlement side. A reserve manager in the Americas noted: “Technology advancements in the subject have been increasing and it is certainly a subject in which central banks should invest in to streamline their processes.” In Europe, a central banker saw the possibilities as limitless: “It is possible in long term that some aspects of this technology could be used for facilitating and protecting transactions, or even that some central banks in the future will issue their own cryptocurrency. Boundaries of technology in finance are inexhaustible”. An Asian reserve manager saw potential benefits for the clearing cycle: “It should promote operational efficiency in terms of settlements; may change/shorten clearing confirmation of trades.”

A reserve manager in Africa saw potential for central banks to adopt this technology: “If we consider how technology is changing nowadays, we believe that once central banks understand this technology better, they might start using it. Because it’s known to be efficient and the technology is always improving.” For a large reserve manager, responsible for more than $100 billion, blockchain technology was set to become a feature of the financial landscape: “We expect the blockchain technology to grow in importance in the coming years, considering its potential for practical applicability and adoption by some key financial market players.” In Africa, a reserve manager commented on technological improvements more broadly, touching on the impact on investable opportunities:

A reserve manager from Europe thought blockchain technologies would have a long term impact on reserve management, however they noted current concerns and that no central bank to their knowledge, had plans to incorporate related currencies into their reserves:

Indeed, 58 reserve managers do not see blockchain related technologies having a significant impact on reserve management in central banks in the short term. A common thread in comments was concern over security. “It seems difficult for central banks to adopt a blockchain related technology, given that its security measures have yet to be tested from several fronts,” said a reserve manager from the Americas. On a more positive note, they added: “However, technological advancements in the subject has been increasing and it is certainly a subject in which central banks should invest in to streamline their processes.” A large reserve holder saw potential emanating from the back office: “If a reliable way of transferring assets via global custodians would be realised with blockchain technology it could have an impact on reserve management as well”. An African reserve manager was more optimistic: “In the short-term, Bitcoin, which runs off blockchain technology, has made tremendous achievements which has provided good reasons for investors to take a keen interest in such technology”.

Two reserve managers alluded to the fact that external managers and custodians had not changed their approach to reserve management in light of these new developments. In the Americas, a reserve manager said: “None of the major markets or custodians has changed their processes with Blockchain related technologies. However, there are a lot of ideas being tested that will eventually disrupt the way we do business”. A lack of change was also referred to by a European central banker: “Too early to say as technology is new. Currently there does not seem much use of the blockchain related technologies but it can happen that something useful comes out from there in the future”. One central bank said they saw no future for blockchain technology in reserve management. Only four central banks said blockchain would have a significant impact on reserves management in the short term.