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The US$4.7 billion Petroleum Fund of
Timor-Leste has begun diversifying its portfolio away from US Treasuries by appointing,
for the first time, an external manager to invest $1 billion in high-grade,
diversified fixed income, and has begun researching global equity managers. The
fledgling democracy’s sovereign wealth fund, which until now was fully invested
in US Treasuries, awarded a dedicated mandate to the Bank for International
Settlements (BIS) to manage US$1 billion in longer-dated US government debt and the
sovereign credit of other nations.

The investment mandate for the Petroleum
Fund, which is enshrined in Timorese law, states that 90 per cent of its assets
must be invested in US Treasuries with maturities of up to five years. Through
its mandate with BIS, approximately 10 per cent of the fund is now invested in
a broader range of bonds, including sovereign and supranational bonds, some of
which are denominated in the Euro, British Pound, Japanese Yen and Australian
Dollar. The mandate, which is non-commercial and therefore incurs a lower
management fee than most others, is managed to a benchmark based on sovereign
bonds issued by eight countries, including the US, UK, European Union, Japanese and
Australian governments.

The Australian business of JP Morgan Worldwide
Securities Services, the fund’s global custodian, finished transitioning the
mandate in the past month. Meantime, the fund has begun searching for external managers
to implement a small proportion of its portfolio in global equities. “We have
begun work on looking for external managers,” Sam Robinson, an institutional adviser
to the fund, said.

In a statement, Emilia Pires, Minister of Finance for Timor-Leste,
said further diversification of the fund’s assets was necessary to potentially generate
higher returns while mitigating risk – even though US Treasuries were among the
safest assets to hold throughout the financial crisis.

She said the mandate with
BIS was the first move made by the fund “to increase its expected return and
better diversify risks”. Created in 2005 by the enactment of the Petroleum Fund
Law, the fund continues to grow from revenues sourced from oil operations in
the Timor Sea, and is managed by the Banking
and Payments Authority of Timor-Leste to achieve returns within 25 basis points
of the Merrill Lynch zero-to-five-year government bond index.

 

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