Investment Policy

This section describes the main elements of the Pension Reserve Fund (PRF) investment policy.

The investment guidelines that specify the objectives, limits, and risk parameters, determined by the Ministry, with support from the Financial Committee, are made available to the public below. These guidelines are used by the Central Bank of Chile and by the external managers of the fund.

Long Term Investment Portfolio (LTIP)(1)

Investment objectives: the main investment objective is to generate resources to finance part of the fiscal obligations in pensions. To this end, the specific objective has been defined to achieve an expected annualized return in pesos of at least 2% over Chilean inflation in a ten-year period, with a probability of at least 60%. At the same time, the risk tolerance establishes that the probability that the fund’s real return will be less than –12%, expressed in pesos, must not be over 5% in any given year. The investment time horizon is considered to be medium to long term, taking into account the size and opportunity of the obligations to be financed.

Strategic asset allocation: The portfolio allocation is 31% in Equities, 34% in Sovereign and government-related bonds, 13% in Corporate bonds, 8% in High yield bonds, 6% in U.S. Agency Mortgage Backed Securities (MBS), and 8% in Inflation-indexed sovereign bonds.

Benchmarks: for each component of the strategic asset allocation, a benchmark has been defined, which corresponds to a representative index of the respective market:

Asset class Percent of LTIP Benchmarks
Equities  31% MSCI All Country World Index ex Chile (USD unhedged, with reinvested dividends)
Sovereign and Government-Related Bonds (a) 34% Bloomberg Barclays Global Aggregate: Treasuries Index (USD unhedged)
Bloomberg Barclays Global Aggregate: Government-Related Index (USD unhedged)
Corporate Bonds 13% Bloomberg Barclays Global Aggregate Corporates Index (USD unhedged)
High Yield Bonds 8% Bloomberg Barclays Global High Yield Index  (USD unhedged)
US Agency MBS 6% Bloomberg Barclays US Mortgage Backed Securities Index 
Inflation-indexed Sovereign Bonds (real) 5% Bloomberg Barclays Global Inflation-Linked Index (USD unhedged)

(a) Each sub-index of this asset class is weighted according to its capitalization size.             

Administration: the Sovereign and government related bond portfolio and the Inflation-indexed sovereign bonds portfolio are managed directly by the Central Bank of Chile, as fiscal agent. The portfolios of Equities, Corporate bonds, High yield bonds, and U.S. Agency MBS are managed by external managers hired by the Central Bank of Chile through a selection process.

Tracking error (ex-ante) limit: an ex-ante tracking error limit of 50 basis points has been defined for the aggregate portfolio of Sovereign and government related bonds and Inflation-indexed sovereign bonds, of 60 basis points for Equities, of 50 basis points for Corporate bonds, and of 150 basis points for High yield bonds. In the case of U.S. agency MBS, it is required that the average for the month be less than 20 basis points and, also that it does not exceed 30 basis points on a daily basis.

The PRF was broken-down into two sub-portfolios between October 1, 2020 and June 8, 2021 t. The first, the Short-Term Investment Portfolio (STIP), existed only during the indicated period and held the resources that would be withdrawn from the fund during 2021. Said portfolio ceased to exist once the withdrawals from the fund were made during 2021. The second, the Long-Term Investment Portfolio (LTIP), has the strategic asset allocation that is described in this section and is the same that the FRP had before the creation of the STIP.


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