Bank of Lithuania’s return on financial assets was record high last year, whereas today the prospects of earning is dampened by war and inflation
The Bank of Lithuania has earned a total of €408 million from own financial asset investment over the last three years, i.e. during its investment assessment period. This is the highest return since 2016-2018, when return over a three-year period became the key indicator for measuring investment performance.
“The strategic decisions taken by the Bank of Lithuania to invest more not only in euro-denominated assets, to increase investments in equities and to foster automated investment innovations have given results even after safe investments in a difficult, very low interest environment,” says Marius Jurgilas, Member of the Board of the Bank of Lithuania.
In 2021, the Bank of Lithuania earned a return of €219 million on its own financial assets (€13 million in 2020), and €408 million during the assessment period in 2019-2021 (€225 million in 2018-2020). A major part of return on financial assets is determined by the strategic allocation of the investment portfolio of €3 billion, while active management further increases returns. Due to this investment portfolio allocation, the return earned in 2021 totalled €136 million, and a further €12 million was earned from active management.
Last year the Bank of Lithuania adopted strategic decisions regarding investment allocation: it increased investments in global equities from €200 million to €300 million, launched active management of investments in equities and increased investments in government securities of Canada and the United Kingdom.
In addition, the Bank of Lithuania is one of the first central banks in the world to have tested and implemented an advanced investment management innovation, i.e. algorithmic trading. When trading in this way, investment and transaction execution decisions are made by computer programs which work with minimal or no human intervention. Algorithmic trading increased the total return by €0.73 million in 2021. In addition to these strategic changes, the Bank of Lithuania, after assessing the current risks, sold its investments in Chinese government securities.
This year, as part of the decision to restructure the investment portfolio of financial assets in accordance with the common principles agreed by the Eurosystem on climate change and responsible investment, €60 million were invested in equities in accordance with sustainable investment principles.
According to Jurgilas, the chances of earning a positive return this year are highly uncertain, as the Russian war against Ukraine dramatically increased uncertainty and volatility in financial markets and stagflation risks in the global economy. This leads to both significant increases in interest rates and potentially low returns for risky asset classes.
The Bank of Lithuania manages the largest investment portfolio in the country: in 2021, the average value of its financial assets unrelated to monetary policy operations amounted to around €4.7 billion. The Bank of Lithuania retains a stable amount of gold reserves recovered after the restoration of independence, i.e. 5.8 tonnes. Last year, the value of gold amounted to €291 million. The main objective of holding financial assets is to ensure the stability of the Lithuanian financial system and to provide a buffer against economic and financial shocks as well as other extraordinary circumstances.