The Monetary Authority of Singapore (MAS) seeks to achieve "good long-term returns" on its reserves through balanced asset allocation, managing director Ravi Menon said yesterday.
Mr Menon told a conference in London: "MAS invests the official foreign reserves in a well-diversified portfolio, probably more diversified than is the case for most central banks."
He added that the MAS investment horizon is longer than that of many central banks, noting: "This has given MAS the flexibility to invest in more volatile (and longer 'duration') asset classes beyond fixed income, including equities."
Each asset class in the portfolio serves a function.
"Cash and nominal government bonds facilitate regular operational needs and can be quickly deployed to fulfil urgent liquidity needs under stressed conditions," said Mr Menon, who was speaking at the National Asset-Liability Management Europe Conference.
"Advanced economy inflation-linked bonds are less liquid than nominal bonds but provide inflation protection. Equities provide exposure to long-term growth assets with higher return potential but also with higher risk," he said.
The portfolio is also geographically diversified across advanced and emerging market economies.
Mr Menon noted: "About three-quarters of the official foreign reserves (are) denominated in US dollars, euros, Japanese yen and pound sterling, with the US dollar forming the bulk."
One area that the MAS is watching closely is factor-based investing, he said, adding: "Institutional investors are starting to look beyond asset classes to view returns via a 'factor lens'.
"Looking through asset class labels to underlying risk factor exposures can enhance understanding of return sources. Flipping them around, they also help to enhance understanding of risk drivers."
For instance, the MAS conducts "vulnerability-based" stress tests in which its portfolio is subject to hypothetical scenarios, which stress various risk factors such as equity, interest rate, credit, inflation and foreign exchange.
Mr Menon said: "This can help investors to create more efficient and diversified portfolios, compared to a traditional asset class-driven approach. But we are also mindful not to fall into the trap of data-mined quantitative strategies that rely on factors that may not be robust through time."
Besides the official foreign reserves, there are two other pots of national reserves in Singapore.
The Government of Singapore Investment Corporation manages a diverse portfolio of foreign assets, well in excess of US$100 billion (S$135 billion).
Temasek holds equity stakes in a variety of domestic and foreign corporates, amounting to more than US$200 billion.
As the central bank, the MAS is the most conservative of the three entities, with the official foreign reserves invested mainly in safe and liquid assets.
Mr Menon said: "The official foreign reserves (are) sized to take into account its role as a buffer against a large and sudden outflow of capital that would undermine confidence in the exchange rate and Singapore's macroeconomic stability."
