In a challenging investment environment, the Bank of Lithuania introduces changes to maximise long-term returns
Given the still challenging investment environment, return on financial assets managed by the Bank of Lithuania (non-adjusted for exchange rate and gold price dynamics) reached 1.41% in 2017. Nonetheless, the significant depreciation of the US dollar against the euro led to a negative return on foreign reserve assets, standing at –1.14%.
‘Excluding the impact of exchange rate dynamics, it is safe to say that we managed to achieve good investment results in an environment of low or even negative interest rates. We broadened the range of investment instruments at our disposal, at the same time diversifying risk to the maximum. The Bank of Lithuania was one of the first central banks in the world to implement the progressive risk parity approach, which ensures equal allocation of risk across the investment portfolio and allows for higher returns in the medium and long term’, said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
The Bank of Lithuania invests financial assets with the aim of diversifying investment risk and increasing expected return over a 3-year investment horizon. In 2015–2017 return on investment amounted to EUR 54.5 million or 2.2%. With the US dollar plummeting against the euro in 2017, the Bank of Lithuania saw negative returns totalling EUR –29.8 million (–1.14%).
According to Mr Garbaravičius, last year the central bank of Lithuania created a USD 1 billion reserve portfolio and started investing in US corporate bonds and inflation-protected securities. In 2018 the Bank of Lithuania plans to start investing in mortgage-backed securities issued by US government agencies.
‘We are seeking new sources of return that would allow earning higher returns in the medium and long term. Higher income from such investments would help outweigh potential investment losses that might stem from the declining prices of debt securities in the event of rising interest rates’, noted the Member of the Board.
The Bank of Lithuania manages the largest investment portfolio in the country: in 2017 the average value of financial assets unrelated to monetary policy operations amounted to EUR 2,213 million.
The gold reserves recovered after the restoration of Lithuania’s independence remain stable at 5.8 tons. Given favourable investment conditions, gold return not only covers storage costs but also boosts profit on financial assets. In 2017 return on gold investment amounted to EUR 0.9 million.
The main objective of holding financial assets is to ensure the stability of the financial system in Lithuania and the euro area and provide a buffer against economic and financial shocks as well as other extraordinary circumstances.