The Financial Markets Department is responsible for investing the financial assets of Eesti Pank.
The goal of investment of the reserves is to earn a moderate level of stable income while ensuring that the assets are preserved over the long term. As Eesti Pank has a long investment horizon, it is able to benefit from the diversification of its investments in a range of asset classes. This allows risks to be diversified better without any concessions being made in the expected return on the investments. The investment portfolio consists of the foreign currency portfolio and the euro portfolio, and is invested in international financial markets. The investments are mainly made in the liquid money and capital markets of developed countries and meet strict requirements for credit quality.
The risk level accepted by Eesti Pank and the expected return are reflected by the benchmark portfolio, which is used for measuring the performance and risks of investments. The Executive Board of Eesti Pank sets the risk level of the benchmark portfolio, basing it on the situation in global financial markets. The benchmark portfolio is reviewed and adjusted to match the agreed risk level at least once a quarter.
In order to maintain sufficient diversity in its investment portfolio, Eesti Pank has invested its reserve assets in money markets and bond markets in Europe, the USA, Australia, Canada and the United Kingdom, and to some extent in the stock markets of developed countries.
Within certain limits, Eesti Pank’s portfolio managers are entitled to assume slightly different investment positions from the benchmark portfolio in order to earn more income than the benchmark portfolio through active investing. Such investment decisions are based on economic analysis, market relationships and other factors. The choice of markets and securities is based on the risk level and the expected return. Portfolio managers invest actively in several markets, using a range of financial instruments and taking investment positions of varying duration. To achieve better risk diversification, portfolio managers make investment decisions independently of each other. To achieve this, the overall risk limit is divided into portions and the use of each portion is left up to its portfolio manager.
External asset managers chosen from among the leading international investment firms also have a role in active investment. The main aim behind hiring external asset managers is to improve the return on asset management, reduce the volatility in the return and gain access to additional skills. The use of external asset managers is based on overlay mandates and the managers express the majority of strategies through derivative instruments. This means that external asset managers can only operate within the risks of the underlying instruments as they have very little actual money at their disposal and the assets continue to be held by Eesti Pank.