Hundred and Seventh Session
Rome, May 2004
Report on Investments 2003
1. This document is submitted to the Finance Committee for information, in accordance with Financial Regulation IX, which provides, in part as follows: “The Director-General may invest monies not needed for immediate requirements seeking, wherever practicable, the advice of an Advisory Committee on Investments. At least once a year the Director-General shall include in the financial statements submitted to the Finance Committee a statement of the investments currently held.”
2. The long-term investment portfolio represents an accumulation in the value of securities and re-invested income over the last 30 years.
3. The principal objective of the portfolio is to fund the Organization’s share of staff-related liabilities:
4. An actuarial valuation of these liabilities has been performed each biennium since 1996-97. The 31 December 2003 valuations show the Organization’s share of aggregate staff-related liabilities to be US$ 432.7 million. The significant increase of liabilities compared to the 2001 valuation is mainly due to the strengthening of the euro relative to the US dollar and the change to a more precise headcount-based methodology for calculating liabilities, instead of a methodology based on pensionable pay.
5. Table 1 shows the evolution of the long-term investment portfolio since 1993 for both market and cost values compared to the actuarial valuations of the staff related liabilities (from 1997).
6. The investment guidelines for the long term investment managers provide for a combination of instruments with a range allocation of:
The allocation as at 31 December 2003 was as follows :
7. The measurement of performance is by comparison to the following benchmark:
8. These benchmarks fairly represent the geographical and sector allocation of the portfolio and have been reviewed by the Investment Committee, Advisory Committee on Investments and by the Organization’s financial consulting firm, Cambridge Associates.
9. Table 2 illustrates the evolution of the long term investment portfolio in 2003.
10. The balances in the long term portfolio amounted to:
|As of 31 December 2002||As of 31 December 2003|
|Market||USD 145,886,397.07||USD 185,577,144.27|
|Cost||USD 138,321,145.58||USD 160,625,427.11|
Market and cost value include accrued interest as reported by the custodian, Northern Trust Company.
11. Movements in the long-term portfolio in 2003 are summarized as follows:
Cash Flow 2003
|Market Value at 31/12/2002||145,886,397.07|
|Net variance of Unrealised gain/loss||17,386,465.50|
|Income Dividends and Interest||6,560,252.06|
|Management and Custodian fees||-612,304.60|
|Accrued Income Change||321,764.49|
|Market Value at 31/12/2003||185,577,144.27|
12. Performance of the long-term portfolio as of 31 December 2003:
|Portfolio||5.53 %||11.75 %||27.21 %||n/a|
|Portfolio result||6.10 %||15.30 %||n/a||28.30 %|
|BENCHMARKMSCI – AC World Free (Gross)||6.30 %||14.40 %||n/a||29.20 %|
|Portfolio result||4.51 %||5.40 %||n/a||11.79 %|
|BENCHMARK: J P Morgan Global Broad Bond Index||4.02 %||5.10 %||n/a||10.03 %|
Table 3 shows the annual net performance of the long-term portfolio since 1994.
13. Reports with details on the securities held and the composition of the long-term portfolio at 31 December 2003 will be available during the session.
14. Short-term investments consist largely of Trust Fund deposits held pending disbursements on project implementation and cash representing the reserves of Regular Programme and other assets. The investments are managed by three specialized asset managers in short-term investments, Western Asset Management, Wellington Management and the Northern Trust Government Select Fund.
15. Following the recommendations of the Advisory Committee on Investments in 2003, additional diversification was introduced in the form of investments in the FIXBIS instrument of the Bank for International Settlements, (BIS), Basel.
16. Balances (market value) of short-term investments at 31 December were as follows:
|Western Asset Management||79,023,002.00||100,721,975.21|
|NT Government Select Fund||235,948,642.76||198,412,727.25|
|Bank for International Settlements||N/A||70,068,979.46|
17. Performance of the short-term investment managers in 2003:
|1 Year||Since |
|Western Asset Management||0.16 %||0.27 %||2.16||2.44 %|
|Wellington Management||0.18 %||0.32 %||1.71||2.15 %|
|Benchmark||0.11 %||0.30 %||1.29||1.46 %|
Benchmark = Merrill Lynch Libor 3 month Constant Maturity
The benchmark up to 01st December 2003 was Merrill Lynch Libor 3 month Constant Maturity + 25 Basis Points (point 18 below also refers).
|Last 3 months||1 Year||Since Inception|
|Northern Trust Government Select Fund||0.22%||1.00%||n/a|
No benchmark is officially defined or agreed for Northern Trust and BIS investments. The investments are in any case measured against the Merrill Lynch 91 Day T-Bill Index for comparison purposes.
18. Following a decision of the internal Investment Committee to reduce credit risk on short-term holdings to the minimum, the investment guidelines for the two portfolios managed by Western and Wellington were amended as from 1 December 2003 to allow only investments in AAA rated securities and to reduce the average duration of the total Asset Portfolio to a maximum of 0.5 years.
19. Reports with details on the securities held and the composition of the Western and Wellington portfolios at 31 December 2003 and a description of the Northern Trust Government Select Fund will be available during the session.
20. The FAO Conference at its 32nd session adopted split assessments whereby from 2004-05 Member Countries pay their Regular Programme contributions partially in US Dollars and partially in Euro.
21. New currency and cash management practices were therefore introduced by FAO Treasury. Operational and legal arrangements have been set up with the Bank for International Settlements in Basel to allow FAO to concentrate Foreign Exchange spot and Foreign Exchange swap deals with one large, non-commercial counterparty.
22. The contract with the long-term asset manager, Fiduciary Trust International was terminated early April 2003. At the termination of the contract, the asset custodian, Northern Trust, was instructed to transfer all fixed income securities (US$ 48.49 million) to a new portfolio account managed by Western Asset Management and all equity positions (US$ 90.01 million) to a new portfolio account managed by Wellington Management.
The remaining assets were liquidated and the proceeds amounting to US$ 13.2 million were transferred to the two new asset managers in a proportion to maintain an asset allocation ratio of approximately 65% equity and 35% bonds.
23. The FAO Investment Committee reviewed the current investment guidelines for the short term investment portfolios managed by Western Asset Management and Wellington Management and, considering that most of the investments relate to Trust Fund contributions, decided to further reduce the risk level of short-term investments by:
Legal framework and guidelines to asset managers have been finalized in the 4th quarter 2003.
First investments in FIXBIS instruments were done late 2003.
24. FAO engaged a specialized firm, Hewitt Bacon & Woodrow, to carry out the Asset and Liability study. The report was presented to the FAO Investment Committee in November 2003. In view of the composition of liabilities which are over 60% Euro related and to best match assets and liabilities, the FAO Investment Committee proposed to reduce equity holdings from a current level of 67% to 50%, and to restructure the Global Fixed-income portfolio into a Euro Fixed income portfolio with a main component of inflation linked bonds. Implementation of these changes is expected during the year 2004.