Timor’s SWF awards first external mandate, begins global equities search

The $4.7 billion Petroleum Fund of Timor-Leste has diversified 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, while undertaking a search for global equity managers.

The fledgling nation’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 $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 week.

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 advisor 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.