INTRODUCTION For over 40 years, development partners have entrusted the World Bank follows a well-defined investment the World Bank with the financial management of their process, applying a conservative risk approach with contributions to World Bank trust funds and Financial ongoing oversight through the World Bank’s financial Intermediary Funds (FIFs). These resources complement governance structure. the World Bank Group’s mission to end extreme poverty and promote shared prosperity in a sustainable way. Sound investment management is an integral part of the Trust funds and FIFs allow for the scaling up of activities, value process to ensure the availability of development notably in fragile and crisis situations; provide immediate partners’ funds for their intended purposes. As such, assistance in response to natural disasters and other preservation of capital has historically been the primary emergencies; and pilot innovations that may be later objective when investing development partners’ financial mainstreamed into the Bank’s operations. resources. Beyond this objective, the World Bank Treasury seeks to prudently add value by judiciously The World Bank as Trustee receives and invests employing appropriate investment strategies within an development partner contributions to trust funds and efficient, flexible, industry leading investment platform. FIFs, until funds are disbursed to final recipients for This allows investment management of trust funds and development projects. Such investment management FIFs in a way that accommodates the varying investment services aim to preserve donor funds and enhance their requirements and risk tolerances of its development value. The trust funds and FIFs portfolio has grown over partners, thus providing opportunities for enhancement the years due to an increase in development partner of investment returns. contributions for multi-year projects, an increase in the number of trust funds managed by the World Bank and The trust funds and FIFs’ investment portfolios managed investment returns. As of 30 June 2018, the volume of by the World Bank have recorded comparable returns to liquid assets held by trust funds and FIFs reached $29.7 the benchmarks with similar risk profiles over the past billion. decade and were able to weather the global financial crisis of 2008/09 remarkably well. The World Bank has This brochure provides information on the World Bank’s been able to enhance investment returns over and above investment management services for development the primary capital preservation objective for investment partners. The Trust Funds and Partner Relations portfolios of trust funds and FIFs. This has been achieved Department (DFTPR) within the World Bank’s Development through an effective asset allocation process and active Finance Vice Presidency (DFi) serves as the liaison portfolio management by the World Bank Treasury. Over between development partners and external/internal the past 5 years1, the total investment income generated clients on strategy, policy, and program management, for the trust funds and FIFs exceeds $1.0 billion while the as well as financial and risk management oversight for incremental investment income for the portfolios earned trust funds and FIF assets managed by the World Bank over their respective benchmarks2, is more than $380 Treasury. million. The World Bank Treasury has substantial expertise in We trust that you will find this brochure informative asset and liability management and a global reputation and look forward to answering any questions that you as a prudent and innovative borrower, investor and risk may have on the investment management process for manager. In managing funds for development partners, development partners’ funds. Akihiko Nishio Jingdong Hua Vice President Vice President and Treasurer Development Finance Vice Presidency Treasury Vice Presidency The World Bank The World Bank 1 As of 30 June 2018 2 Refer to the summaries of each Model Portfolio at the back of this booklet for benchmark information. Investment Management of Trust Funds & Financial Intermediary Funds 1 BACKGROUND The World Bank Treasury has extensive experience in (FIFs). In this function, the World Bank takes on different managing and investing development partner financial financial management and advisory roles, while project resources. It has mobilized and managed development implementation and oversight in developing countries is partner contributions since 1960 when the International carried out by donor agencies or other entities. Development Association (IDA) was created to support the poorest countries through interest free and long All trust funds and FIFs assets administered by the maturity loans. Since the 1980s, development partners World Bank are maintained in a commingled investment have also provided bilateral aid resources and other portfolio (the “Pool”). To accommodate varying investment contributions through trust funds managed by the World horizons and risk tolerances of individual trust funds, the Bank, and over the past decade, have engaged the Pool comprises of sub-portfolios, called Model Portfolios, World Bank as trustee for Financial Intermediary Funds in which trust funds and FIFs liquid assets can be invested. Photo by Trevor Samson from World Bank Photo Collection 2 Investment Management of Trust Funds & Financial Intermediary Funds TRUST FUNDS ASSETS UNDER MANAGEMENT Over the last ten years, the investment portfolio for international capital markets until funds are disbursed to combined trust funds and FIFs has seen substantial final recipients for development projects. Such investment growth with the value of liquid assets increasing from services aim to preserve development partners’ funds $15.6 billion at end of June 2008, to $29.7 billion at end and enhance their value. of June 2018. This growth is reflective of the World Bank’s focus on designing and establishing new trust funds, Trust funds and FIFs receive funds from development developing tailored financial solutions (including through partners in multiple currencies. Upon receipt by the World FIFs) to address development challenges, and growth in Bank, these funds are typically invested in the currency size of a few of these FIFs. of eventual disbursements to recipients in developing countries. The commitment authority for trust funds and After development partners pay in their contributions, FIFs are monitored in US dollars; as such, the investment the World Bank Treasury invests these resources in the portfolio is held primarily in US dollars. Development Partner Funds Under Management Fiscal Years 2002 - 2018 35 30 In billions, USD Eq. 25 20 15 10 5 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 IBRD/IDA TFs Financial Intermediary Funds Investment Management of Trust Funds & Financial Intermediary Funds 3 GOVERNANCE & OVERSIGHT Institutional oversight for programs funded by Bank administered trust funds and FIFs subject to development partners is provided by the World Bank’s any specific instructions provided by development Executive Directors (Board), Committees of the Board such partners or governing bodies thereof. This includes for as the Audit Committee, the World Bank Group President example specification of an expanded range of eligible as well as members of the senior management team. The investments, such as equities. oversight of the financial management arrangements for the investment portfolios of the trust funds and FIFs are The investment strategies for trust funds and FIFs undertaken by the Finance and Risk Committee (FRC), portfolio are periodically reviewed and approved by which is chaired by the World Bank Group Chief Financial the appropriate departments and financial committees, Officer. including the Board’s Audit Committee which reviews the investment strategies. In addition, investment The World Bank Treasury is vested with the responsibility policy and asset allocations are assessed in regular of managing the investment portfolios of trust funds and management discussions, while investment returns are FIFs in a fiduciary capacity. The provisions of the World reported at least monthly. DFi approves the investment Bank Board approved General Investment Authorizations benchmarks and conducts regular reviews of the liquidity for the International Bank for Reconstruction and requirements and allocation of investment balances to Development (IBRD) and the International Development specific investment tranches. Association (IDA) also apply to the investment of World Front row from Left: Ivana Pavlovic, Mei Leng Chang, Wendy Mendes, Dirk Reinermann Second Row from Left: Shenghua Si, Rahul Gupta, Fergal O’Keeffe, Suzanne Marie Boughner Third Row from Left: Feng Gu, Chaminda Ranasoma, Wayne Austin Schwartz 4 Investment Management of Trust Funds & Financial Intermediary Funds INVESTMENT OBJECTIVES & STRATEGY Preservation of capital is the primary investment objective to conservative overall risk tolerance parameters. Funds of the investment Pool, reflecting donor sensitivity to within the portfolio are periodically rebalanced among any potential losses of capital that could result from the model portfolios to ensure that they are allocated to adverse movements in the international capital markets. the most suitable investment mix, based on multi-year Cognizant of the fact that individual trust funds and FIFs cash flow projections for each fund. within the pool might have different investment horizons due to differing liquidity needs and risk tolerances, the Each model portfolio seeks to maximize investment World Bank Treasury offers model portfolios with specific returns over distinct investment horizons, which range investment objectives, investment horizons and risk from daily up to five years. For example, a model portfolio tolerances. The asset allocations for each of the model for longer term investments (5-year investment horizon portfolios are designed to achieve these investment or greater) is available for trust funds and FIFs that have objectives. a stable cash flows over that horizon, meaning they may take advantage of a more diversified allocation including Consequently, the investment portfolios are managed an allocation to global developed market equities. At a Glance - The Investment Portfolio of Trust Funds and FIFs The World Bank manages the liquid assets of trust funds and FIFs in a single, commingled investment pool which provides several benefits to its participants, such as: • A selection of model portfolios to accommodate the varying liquidity needs and risk preferences of different funds, managed within a comprehensive risk management framework. • Access to a wide variety of investment products and longer maturity investments to enhance returns and investment income over time. • A cost-effective investment platform resulting in very low administrative costs to participants. • Regular review of liquidity needs across funds to optimize investments over the longer term. Photo by Curt Carnemark from World Bank Photo Collection Investment Management of Trust Funds & Financial Intermediary Funds 5 Model Portfolios for Investments of Trust Funds and FIFs Model Model Model Model Model Model Portfolio 0 Portfolio 1 Portfolio 2 Portfolio 33 Portfolio 44 Portfolio 55 Cash & Cash Capital Capital LIBOR based Return Return Equivalents preservation preservation optimization optimization over a 1-year over a 3-year over a 5-year over a 5-year horizon horizon horizon horizon Investment Enhance Enhance Enhance Maximize Enhance Enhance Objective returns returns returns returns returns returns subject to subject to subject to subject to subject to subject to ensuring preservation preservation 3-month preservation preservation liquidity of capital to a of capital to a interest rate of capital to a of capital to a & timely high degree high degree sensitivity high degree high degree availability of of confidence of confidence of confidence of confidence cash when over a 1-year over a 3-year over a 5-year over a 5-year needed horizon horizon horizon horizon Asset Overnight Dynamic Dynamic LIBOR based Dynamic Dynamic Allocation/ cash (Government (Government (Government (Government Benchmark bonds and bonds, money bonds, money bonds, money money markets and markets and markets and markets) US Agency US Agency US Agency MBS) MBS) & global MBS) & up to developed 10% global market developed equities market equities Currencies USD and EUR USD and EUR USD USD USD USD Historical 1-yr 1.71% (Excess 1.60% (Excess 1.48% (Excess 1.87% (Excess NA 2.44% (Excess Return (USD Return 41 bps) Return 34 bps) Return 24 bps) Return 34 bps) Return 18 bps) only) Historical 3-yr 3.01% (Excess 3.42% (Excess 4.03% (Excess 3.90% (Excess NA 6.52% (Excess Cumulative Return 87 bps) Return 1.03%) Return 93 bps) Return 1.21%) Return 78 bps) Return (USD only) 3 Customized and designed for a single fund only. 4 Participation in Model Portfolio 4 (MP4) is subject to specific instructions from the relevant trust fund or FIF governing body. MP4 has been approved, but it has not been implemented. 5 Customized and designed for a single fund only. 6 Investment Management of Trust Funds & Financial Intermediary Funds INVESTMENT PROCESS AND METHODOLOGY The investment of development partners’ funds in the and their weights in the model portfolio, together with the international capital markets follows a well-defined appropriate benchmark for each asset class. Benchmark process, involving different stages of review, approval holdings guide the structure of actual portfolios, wherein and ongoing monitoring and controls. The process starts investments are made through approved counterparties by establishing the appropriate investment strategy for in the capital markets, based on investment guidelines the funds to be invested. This strategy is guided by the that limit market risk (such as interest rate risk) and credit liquidity profile of the development partners’ funds and exposure. All credit limits for holding funds for investment a defined set of investment objective and risk tolerance with commercial counterparties are determined by the limits, which are reviewed and approved by appropriate World Bank’s Chief Risk Officer’s Market and Counterparty departments and financial committees. Risk Department. Ongoing risk measurement and performance reporting for the investment portfolios of The asset allocation for each model portfolio defines the trust funds and FIFS are conducted on a daily basis within suitable types of investment instruments (asset classes) the Bank’s Treasury. Photo by Aisha Faquir from World Bank Photo Collection Investment Management of Trust Funds & Financial Intermediary Funds 7 ASSET CLASSES The Investment Guidelines for the trust funds and FIFs government agencies, as well as multilateral and other investment portfolios specify the allowable range of official institutions. In addition, eligible instruments instruments, for each asset class, within the high-grade include asset-backed and agency-guaranteed fixed income category (such as government bonds) as mortgage-backed securities, as well as swaps and a well as money market securities (such as short-term range of other derivative instruments that can be used investments with commercial banks). to manage interest rate risk. Investments in synthetic short-duration USD assets, obtained by asset swapping Currently, these instruments include high quality longer duration bonds denominated in USD as well as securities that are issued by sovereign governments, non-dollar currencies, is also permitted. Asset Classes for Trust Funds and FIF Portfolios Asset Class Asset Description Domestic Government Securities Marketable bonds, notes or other obligations issued or unconditionally guaranteed by the government of a country in its own domestic currency and approved by the World Bank’s Credit Committee. Mortgage-backed Securities US Agency-guaranteed residential mortgage-backed securities, including (MBS) fixed-rate pass-throughs, adjustable rate mortgages (ARMs), interest-only (IO) and principal-only (PO) strips, and collateralized mortgage obligations (CMOs). Commercial Mortgage Backed Securities (CMBS) and non-agency MBS are not included. AAA Corporate Securities (incl. Asset AAA-rated asset-backed securities (ABS), backed by student loans, Backed Securities) auto and credit card receivables, public sector loans or prime first lien residential mortgages and domiciled in an eligible country, and any other AAA-rated obligations of a corporate entity. Agency/ Sovereign/ Government Marketable bonds, notes or other obligations rated at least AA- issued guaranteed Securities by a government agency, supranational institution or local authority domiciled in an eligible country as well as corporate debt guaranteed by the government of eligible countries. Money Market Instruments/ Financial Time deposits, certificates of deposit, reverse repurchase agreements Institutions Securities and other obligations issued or unconditionally guaranteed by a bank or other financial institution domiciled in an eligible country, whose senior debt securities are rated at least A- and maturing in 3 months or less. Developed Market Equities A stock or any other security representing an ownership interest. Swaps and Derivatives Financial futures and options contracts, other derivative and associated instruments, forward rate agreements, swap transactions, options to enter into swap transactions in the future, and foreign exchange contracts. 8 Investment Management of Trust Funds & Financial Intermediary Funds Asset Composition of the Trust Funds & Financial Intermediary Funds Portfolio Fiscal Years 2014-2018 100% 80% 60% 40% 20% 0 FY14 FY15 FY16 FY17 FY18 Money Market Sovereign Guaranteed Agency Bonds Covered Bonds Mortgage Backed Securities Asset Backed Securities Domestic Government Bonds Developed Market Equities Photo by Dominic Chavez from World Bank Photo Collection Investment Management of Trust Funds & Financial Intermediary Funds 9 INVESTMENT PERFORMANCE The investment portfolios for trust funds and FIFs have volatility. When interest rates decrease in major markets, outperformed their Investment Products benchmarks bonds providing a fixed coupon income will increase in over the past five years, reflecting the prevailing market market value, and this will increase the total return from conditions, which have been characterized by historically holding these bonds (see also technical box on “Impact low fixed income yields and increased interest rate of Market Yields on Fixed Income Portfolios”). Portfolio Returns of Trust Funds Fiscal Years 2014-2018 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0 FY14 FY15 FY16 FY17 FY18 -0.50% -1.00% USD Model Portfolio 0 USD Model Portfolio 1 USD Model Portfolio 2 USD Model Portfolio 3 USD Model Portfolio 5 EUR Model Portfolio 0 EUR Model Portfolio 1 Over the past five-year period, the World Bank has been excess returns were posted by the model portfolios able to deliver investment returns over and above the against their Investment Products benchmarks, as shown primary capital preservation objective for investment in the chart. Over the past five years, the excess return portfolios of trust funds and FIFs. This was achieved translated into an income estimated at around $380 through an effective asset allocation process and active million for the investment portfolio of trust funds and FIFs. portfolio management by the World Bank Treasury. More, 10 Investment Management of Trust Funds & Financial Intermediary Funds Excess Returns of Trust Funds Model Portfolios vs Benchmarks Fiscal Years 2014-2018 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0 FY14 FY15 FY16 FY17 FY18 USD Model Portfolio 0 USD Model Portfolio 1 USD Model Portfolio 2 USD Model Portfolio 3 USD Model Portfolio 5 EUR Model Portfolio 0 EUR Model Portfolio 1 EUR Model Portfolio 5 To further illustrate, the accompanying chart highlights the overall higher returns relative to risk of the model portfolios compared to that of the benchmark allocations. Trust Fund Historical Total Return and Risk Characteristics for Trust Funds and Financial Intermediary Funds 1.4% 1.4% MP2 Return 1.2% 1.2% Annual 5-year Returns (%) 1.0% 1.0% Trust Funds Return MP2 Investment Products MP1 Return Benchmarks Return 0.8% 0.8% Trust Funds Investment Benchmark Return MP0 Return 0.6% 0.6% MP1 Investment Products Benchmarks Return MP0 Investment Products Benchmarks Return 0.4% 0.4% 0.2% 0.2% 00 0.10% 0.20% 0.30% 0.30% 0.40% 0.50% 0.60% Annualized Risk (%) (Standard Deviation) Investment Management of Trust Funds & Financial Intermediary Funds 11 RISK MANAGEMENT The risk tolerance or the risk-taking capacity of the risk measures such as the probability of negative return or trust funds and FIFs investment portfolios is considered Value at Risk (VaR). These qualities include the following: to be very conservative. Conditional Value-at-Risk (CVaR) measure is the primary risk measure used in the • In general, CVaR is a superior risk measure to probability management of the model portfolios for trust funds and of negative returns or the VaR measure. In normal market FIFs and is defined as limiting the estimated average loss environments (i.e., expected returns are assumed to to the portfolio in the worst 1% of loss events. The World be normally distributed), the three measures behavior Bank Model Portfolios have their overall market risk is equivalent. In non-normal environments, however, constrained by a CVaR measure as follows: using CVaR enables investors to limit the magnitude of tail loss (i.e. the full spectrum of adverse scenarios Model Portfolio 1 – 99% CVaR of -25 basis points beyond a simple confidence level), while probability of Model Portfolio 2 – 99% CVaR of -100 basis points negative return does not address the magnitude of loss Model Portfolio 4 – 99% CVaR of -100 basis points and the VaR measure only addresses losses at one confidence level. Model Portfolios 3 and 5 are further subject to separate sets of investment guidelines set forth in the contractual • In addition, in the current low interest rate environment, undertakings governing the relationships with the the probability of negative return measure is very relevant entities. sensitive to small changes in yield levels and may signal frequent and unnecessary asset allocation changes In addition to the information embedded in the risk which may result in unnecessary transaction costs. The measure (which neatly captures the perceived risk CVaR measure is found to be less reactive to small yield preferences of trust fund clients), CVaR also has desirable changes and can significantly reduce unnecessary statistical features that make it preferable to alternative rebalancing transactions based on empirical studies. Photo by Curt Carnemark from World Bank Photo Collection 12 Investment Management of Trust Funds & Financial Intermediary Funds Technical Box - Impact of Market Yields on Fixed Income Portfolios Investment returns on high quality fixed income conservative portfolios with a limited tolerance portfolios are made up of two components: (i) for negative returns tend to have shorter portfolio periodic coupon income at the fixed contractual durations; and the lower the level of market interest interest rate, and (ii) price changes, or change in rates, the shorter the portfolio duration will have to market value of principal due to changes in interest be in order to preclude any reported losses. rates. All other things being equal, an increase in interest rates results in a decrease in the value The chart below shows the historical rolling 12-month of the original investment in fixed coupon bonds; returns of USD Model Portfolio 1 (as a proxy for the conversely, a decrease in market interest rates investment portfolio of trust funds and FIFs) against results in an increase in the value of the original the yields on US Treasury 2-year bonds (as a proxy for bond investment. If bonds are held until their the level of US interest rates). The declining interest maturity date, there will be no impact from these rates in 2007-2008 were followed by increasing temporary (mark-to-market) price changes on the or high investment returns. In contrast, periods total investment return earned at maturity. of rising rates, such as in 2004-2005, have seen declining or low reported total investment returns. If the second component of investment returns (i.e. However, during that period, the coupon income, as changes in price) is negative over a given period, and indicated by the level of yields, was high enough its magnitude exceeds the periodic coupon income, to cushion the negative impact from falling market the total investment return over the reporting period prices, such that the total return of the investment can be negative, thus resulting in a decrease in the remained positive. With interest rates remaining overall value of the bond investment. While longer near historically low levels in the United States and maturity bonds typically carry a higher interest rate other major markets following the global financial and thus generate higher coupon income relative crisis since 2009, returns of USD Model Portfolio 1 to shorter maturity bonds, they are also more (and the investment portfolios of trust funds and FIFs susceptible to market price changes as a result of as a whole) remain low in historic terms. a change in interest rates. Other things being equal, 8% 6% 7% 5% 6% 12-month rolling returns 4% UST 2-year yields 5% 4% 3% 3% 2% 2% 1% 1% 0 0 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Jun-12 Feb-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Market Interest Rate (UST 2-year yield) (RH Axis) Rolling 1 Year Trust Fund Returns (LH Axis) Note: The shaded areas denote periods of generally rising vs. falling interest rates, respectively. Investment Management of Trust Funds & Financial Intermediary Funds 13 GLOSSARY OF TERMS Financial Intermediary Funds (FIFs) Financial Intermediary Funds are financial arrangements that leverage a variety of public and private resources in support of global development initiatives and partnerships. These funds involve financial engineering or complex finance schemes, or where the World Bank provides a specified set of administrative, financial, and/or operational services. General Investment Authorizations General Investment Authorization for IBRD (Resolution No. 2012-0008), adopted by the Executive Directors on December 5, 2012, as may be amended from time to time, and General Investment Authorization for IDA (Resolution no. IDA 2012-0005), adopted by the Executive Directors on December 5, 2012, as may be amended from time to time. Investment Pool World Bank trust funds and FIFs assets invested and managed by TRE as a commingled portfolio. Investment Products Sub-portfolios covering specific market sectors, including, but not limited to, US Agency MBS, UST 1-5 year, TIPS etc. Model Portfolios Combinations of Investment Products that seek to generate a specific risk/return profile or other specified investment objective. They reflect the actual portfolio holdings. Strategy World Bank Investment Strategy, reviewed and approved within the World Bank Governance arrangements, which describes the investment framework for World Bank trust funds and FIFs. Trust Fund A financing arrangement set up to accept contributions from one or more donors to be held and disbursed/transferred by a World Bank Group entity as trustee in accordance with agreed terms. 14 Investment Management of Trust Funds & Financial Intermediary Funds Photo by Jerome Ascano from World Bank Photo Collection MODEL PORTFOLIO 0 CASH & CASH EQUIVALENTS JUNE 2018 INVESTMENT OBJECTIVE Model Portfolio 0 aims to enhance returns through investment in cash and cash equivalent securities, subject to ensuring liquidity and timely availability of cash when needed. Model Portfolio 0 houses trust funds and FIFs that are invested in cash, and the working capital for trust funds INCEPTION DATE CURRENCIES and FIFs that are invested in other Model Portfolios. Model Portfolio 0 has 1 April 2008 USD and EUR two investment classes in USD and EUR. INVESTMENT UNIVERSE The investment universe of Model Portfolio 0 includes the following money market instruments: time deposits, certificates of deposit, reverse repurchase agreements and other obligations issued or unconditionally INVESTMENT ASSETS UNDER guaranteed by a bank or other financial institution domiciled in an eligible HORIZON MANAGEMENT country, whose senior debt securities are rated at least A- and maturing Up to 3 months USD 4,143 million in 3 months or less. EUR 823 million ASSET ALLOCATION Model Portfolio 0 is fully invested in cash and cash equivalent securities. Figure 1: Asset Allocation of Model Portfolio 0 Cash & Cash Equivalents 100% BENCHMARKS Each investment class under Model Portfolio 0 (USD and EUR) has a benchmark against which risk and return limits are measured. These benchmarks are: Strategy Benchmark USD Model Portfolio 0 Bank of America/Merrill Lynch USD Overnight Deposit Bid Rate Index EUR Model Portfolio 0 Bank of America/Merrill Lynch EUR Overnight Deposit Bid Rate Index HISTORICAL RETURNS The chart below shows the historical investment performance of USD Model Portfolio 0 over the last 5 years. Since inception, USD Model Portfolio 0 has not incurred an investment loss over its investment horizon, though it may go through periods where it incurs negative returns. Figure 2: Asset Allocation of Model Portfolio 0 104.0 0.20% 103.5 103.0 0.15% Indexed Cumulative Return 102.5 Monthly Return % 0.10% 102.0 101.5 0.05% 101.0 100.5 0.00% 100.0 99.5 -0.05% Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 USD Model Portfolio 0 (RH Axis) USD Model Portfolio 0 Cumulative Indexed Return (LH Axis) USD Model Portfolio 0 Benchmark Cumulative Indexed Return (LH Axis) MODEL PORTFOLIO 1 CAPITAL PRESERVATION OVER A 1-YEAR HORIZON JUNE 2018 INVESTMENT OBJECTIVE Model Portfolio 1 is a high quality, short duration fixed income portfolio which aims to maximize returns subject to a Board specified risk constraint. The risk constraint is expressed as the 1-year 99% Conditional VaR being no worse than -25 bps (-1%). INCEPTION DATE CURRENCIES 31 January 2005 USD and EUR INVESTMENT UNIVERSE The investment universe of Model portfolio 1 includes obligations of local currency Sovereigns, foreign currency Sovereigns, Agencies, other official entities and Multilaterals rated at least AA-; Corporates and Asset Backed Securities rated at least AAA; deposits with banks rated at least A-; and a broad range of derivatives. INVESTMENT ASSETS UNDER HORIZON MANAGEMENT ASSET ALLOCATION 1 year USD 11,514 million Model Portfolio 1 can be invested in one or more of three underlying strategies: 0-1 year Treasuries, 1-5 year Treasuries, and LIBOR Plus. The overall asset allocation of Model Portfolio 1 is determined by the World Bank Treasury’s Investment Management Department with the aim of maximizing returns while remaining within its risk constraints. Figure 3: Asset Allocation of Model Portfolio 1 Allocation by Investment Product (%) Allocation by Asset Class (%) ABS 1-5 year Treasuries 4.3% Cash & Cash 15% Equivalents Covered Bonds 28.4% 10.9% Libor Plus Supranationals/ 85% Agency Multilaterals 13.9% 2.9% Sovereign Corporates Government 0.2% 40% BENCHMARKS Each of the three Investment Products within USD Model Portfolio 1 has a benchmark, against which any limits related to relative risk and return for each Investment Product are measured. The Investment Products and their corresponding benchmarks are as follows: Strategy Benchmark 0-1 Year Treasuries Bank of America/Merrill Lynch US Treasuries 0-1 Index 1-5 Year Treasuries Bank of America/Merrill Lynch US Treasuries 1-5 Index Libor Plus Bank of America/Merrill Lynch USD 3-Month LIBID Average Index RISK STATISTICS Generating enhanced investment returns while adhering to the investment objective of capital preservation and ensuring sufficient liquidity to meet foreseeable cash flow needs is undertaken within a conservative risk management framework which limits the estimated average loss to the portfolio in the worst 1% of loss events. This Conditional Value-at-Risk (CVaR) measure is the primary risk constraint used in the management of Model Portfolio 1. The overall market risk within Model Portfolio 1 is constrained by a CVaR measure as follows: 99% CVaR of no greater than -25 basis points. The World Bank Treasury continually monitors the asset allocation of Model Portfolio 1 to ensure it best represents the investment objective and remains compliant with the relevant risk constraint. A team of investment professionals analyzes market movements and macro-economic trends carefully and stress tests each Model Portfolio against possible future scenarios: the current scenario in which the model assumes that interest rates will remain unchanged over the investment horizon, and the forward scenario, in which the model assumes that yields will converge to forward rates (estimated using the Nelson-Siegel model). As of 30 June 2018, the CVaR for Model Portfolio 1 at 99% confidence interval under each scenario was 1.96% and 2.02% respectively, both well within the risk constraint. This is interpreted to mean that in the worst 1% of cases, the portfolio is still expected to achieve positive returns. HISTORICAL RETURNS The chart below shows the historical investment performance of USD Model Portfolio 1 over the past 5 years. Since inception, Model Portfolio 1 has never incurred an investment loss over its investment horizon although it may go through periods where it incurs negative returns. Figure 4: Asset Allocation of Model Portfolio 1 105.0 0.30% 104.0 0.25% Indexed Cumulative Return 103.5 0.20% Monthly Return % 102.0 0.15% 101.0 0.10% 100.0 0.05% 99.0 0.00% 98.0 -0.05% 97.0 -0.15% Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 USD Model Portfolio 1 (RH Axis) USD Model Portfolio 1 Cumulative Indexed Return (LH Axis) USD Model Portfolio 1 Benchmark Cumulative Indexed Return (LH Axis) MODEL PORTFOLIO 2 CAPITAL PRESERVATION OVER A 3-YEAR HORIZON JUNE 2018 INVESTMENT OBJECTIVE The investment objective of USD Model Portfolio 2 is to maximize returns over a 3 year investment horizon subject to a Board specified risk constraint. The risk constraint of Model Portfolio 2 is expressed as the 3-year 99% Conditional VaR being no worse than -100 bps (-1%). INCEPTION DATE CURRENCIES 31 January 2005 USD INVESTMENT UNIVERSE The investment universe of Model Portfolio 2 includes obligations of any local currency Sovereigns; obligations of foreign currency Sovereigns, Agencies, other official entities and Multilaterals rated at least AA-; Corporates and Asset Backed Securities rated at least AAA; deposits with banks rated at least A-; and a broad range of derivatives. INVESTMENT ASSETS UNDER HORIZON MANAGEMENT ASSET ALLOCATION 3 years USD 6,834 million Model Portfolio 2 can be invested in one or more of four underlying strategies (known as Investment Products): 0-1 year Treasuries, 1-5 year Treasuries, Mortgage Backed Securities, and LIBOR Plus. The overall asset allocation of Model Portfolio 2 is determined by the World Bank Treasury’s Investment Management Department with the aim of maximizing returns while remaining within its risk constraints. Figure 5: Asset Allocation of Model Portfolio 2 Allocation by Investment Product (%) Allocation by Asset Class (%) ABS Mortgage Backed Cash & Cash 4.3% Securities Equivalents 25% 26.2% Sovereign Libor Plus Government Swap/FX Swap 28.7% 75% 1.4% Covered Bonds 7.6% Agency 5.6% Supranationals/ Multilaterals MBS 2.2% 24.3% BENCHMARKS Each of the four Investment Products within USD Model Portfolio 2 has a benchmark, against which any limits related to relative risk and return for each Investment Product are measured. The Investment Products and their corresponding benchmarks are as follows: Strategy Benchmark 0-1 Year Treasuries Bank of America/Merrill Lynch US Treasuries 0-1 Index 1-5 Year Treasuries Bank of America/Merrill Lynch US Treasuries 1-5 Index Mortgage Backed Securities Bloomberg US MBS Index Libor Plus Bank of America/Merrill Lynch USD 3-Month LIBID Average Index RISK STATISTICS Generating enhanced investment returns while adhering to the investment objective of capital preservation and ensuring sufficient liquidity to meet foreseeable cash flow needs is undertaken within a conservative risk management framework which limits the estimated average loss to the portfolio in the worst 1% of loss events. This Conditional Value-at-Risk (CVaR) measure is the primary risk constraint used in the management of Model Portfolio 2. The overall market risk within Model Portfolio 2 is constrained by a CVaR measure as follows: 99% CVaR of no greater than -100 basis points. The World Bank Treasury continually monitors the asset allocation of Model Portfolio 2 to ensure it best represents the investment objective of the portfolio while remaining within the relevant risk parameters. A team of investment professionals analyzes market movements and macro-economic trends carefully and stress tests each Model Portfolio against two possible future scenarios: the current scenario in which the model assumes that interest rates will remain unchanged over the investment horizon, and the forward scenario in which the model assumes that yields will converge to forward rates (estimated using the Nelson-Siegel model). As of 30 June 2018, the CVaR for Model Portfolio 2 at 99% confidence interval under the current and forward scenarios was 5.36% and 6.61% respectively, both well within the risk constraint. HISTORICAL RETURNS The chart below shows the historical investment performance of USD Model Portfolio 2 over the past 5 years. Since inception, Model Portfolio 2 has never incurred an investment loss over its investment horizon although it may go through periods where it incurs negative returns. Figure 6: Asset Allocation of Model Portfolio 2 107.0 0.80% 106.0 105.0 0.60% Indexed Cumulative Return 104.0 Monthly Return % 0.40% 103.5 102.0 0.20% 101.0 100.0 0.00% 99.0 98.0 -0.20% 97.0 96.0 -0.40% Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 USD Model Portfolio 2 (RH Axis) USD Model Portfolio 2 Cumulative Indexed Return (LH Axis) USD Model Portfolio 2 Benchmark Cumulative Indexed Return (LH Axis) MODEL PORTFOLIO 3 LIBOR BASED OVER A 1-YEAR HORIZON JUNE 2018 INVESTMENT OBJECTIVE USD Model Portfolio 3 was established for a specific mandate with interest rate sensitivity matching that of liabilities funding the portfolio. INCEPTION DATE CURRENCIES INVESTMENT UNIVERSE 11 June 2006 USD The investable universe is restricted to obligations of any local currency Sovereigns; foreign currency Sovereigns, Agencies, Other Official Entities and Multilaterals rated at least AA-; Corporates and Asset Backed Securities rated at least AAA; and Deposits with Banks rated at least A-. ASSET ALLOCATION INVESTMENT ASSETS UNDER USD Model Portfolio 3 can be invested in one or more strategies (known HORIZON MANAGEMENT as Investment Products), the combination of which is known as the asset 1 year USD 965 million allocation. This asset allocation is the responsibility of the World Bank Treasury’s Investment Management Department (IMD) and is actively managed by IMD with the aim of maximizing returns while ensuring that USD Model Portfolio 3 remains in compliance with its risk constraints. Figure 7: Asset Allocation of Model Portfolio 3 Allocation by Investment Product (%) Allocation by Asset Class (%) Cash & Cash Equivalents 35.1% Libor Plus Sovereign MBS Government 100% -1% 38.7% Supranationals/ Multilaterals 2.9% ABS Agency 5% 7% Covered Bonds 10% BENCHMARKS Each Investment Product forming part of USD Model Portfolio 3’s asset allocation has a benchmark, against which any limits related to relative risk and return for each Investment Product are measured. Given USD Model Portfolio’s 3 current asset allocation, the relevant benchmark is: Strategy Benchmark Libor Plus Bank of America/Merrill Lynch USD 3-Month LIBID Average Index HISTORICAL RETURNS The chart below shows the historical investment performance of USD Model Portfolio 3 over the past 5 years. Since inception, USD Model Portfolio 3 has never incurred an investment loss over its investment horizon although it may go through periods where it incurs negative returns. Figure 8: Asset Allocation of Model Portfolio 3 106.0 0.30% 105.0 0.25% Indexed Cumulative Return Monthly Return % 1040 0.20% 103.0 0.15% 102.0 0.10% 101.0 0.05% 100.0 0.00% Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 USD Model Portfolio 3 (RH Axis) USD Model Portfolio 3 Cumulative Indexed Return (LH Axis) USD Model Portfolio 3 Benchmark Cumulative Indexed Return (LH Axis) MODEL PORTFOLIO 4 RETURN OPTIMIZATION OVER A 5-YEAR HORIZON JUNE 2018 INVESTMENT OBJECTIVE The investment objective of USD Model Portfolio 4 is to maximize returns over a 5 year investment horizon subject to a Board specified risk constraint. The risk constraint of USD Model Portfolio 4 is expressed as the 5-year 99% Conditional VaR being no worse than -100 bps (-1%). INCEPTION DATE CURRENCIES TBD USD INVESTMENT UNIVERSE The investable universe is restricted to obligations of any local currency Sovereigns; obligations of foreign currency Sovereigns, Agencies, Other Official Entities and Multilaterals rated at least AA-; Corporates and Asset Backed Securities rated at least AAA; and deposits with banks rated at least A-. INVESTMENT ASSETS UNDER HORIZON MANAGEMENT ASSET ALLOCATION 5 years TBD USD Model Portfolio 4 can be invested in one or more of four underlying strategies (known as Investment Products): 0-1 year Treasuries, 1-5 year Treasuries, Mortgage-backed Securities, LIBOR Plus and Equities. The overall asset allocation of USD Model Portfolio 4 is determined by the World Bank Treasury’s Investment Management Department (IMD) with the aim of maximizing returns while remaining within its risk constraints. BENCHMARKS Each of the Investment Products within USD Model Portfolio 4 has a benchmark, against which any limits related to relative risk and return for each Investment Product are measured. The Investment Products and their corresponding benchmarks are as follows: Strategy Benchmark 0-1 Year Treasuries Bank of America/Merrill Lynch US Treasuries 0-1 Index 1-5 Year Treasuries Bank of America/Merrill Lynch US Treasuries 1-5 Index Mortgage Backed Securities Barclays Capital US MBS Index Libor Plus Bank of America/Merrill Lynch USD 3-Month Deposit Bid Rate Average Index Developed Market Equities MSCI World Index - Hedged RISK STATISTICS Generating enhanced investment returns while adhering to the investment objective of capital preservation and ensuring sufficient liquidity to meet foreseeable cash flow needs is undertaken within a conservative risk management framework which limits the estimated average loss to the portfolio in the worst 1% of loss events. This Conditional Value-at-Risk (CVaR) measure is the primary risk constraint used in the management of Model Portfolio 4. The overall market risk within Model Portfolio 4 is constrained by a CVaR measure as follows: 99% CVaR of no greater than -100 basis points. The World Bank Treasury will continually monitor the asset allocation of Model Portfolio 4 to ensure it best represents the investment objective of the portfolio while remaining within the relevant risk parameters. MODEL PORTFOLIO 5 CAPITAL PRESERVATION OVER A 5-YEAR HORIZON JUNE 2018 INVESTMENT OBJECTIVE USD Model Portfolio 5 was established for a specific mandate, with the investment objectives of capital preservation and maximizing returns, subject to prudent risk limits and maintaining adequate liquidity to meet foreseeable cash flow needs. The risk constraint of Model Portfolio 5 is INCEPTION DATE CURRENCIES expressed as the 5-year 95% Conditional VaR being no worse than -100 31 October 2014 USD bps (-1%). INVESTMENT UNIVERSE The investment universe of Model Portfolio 5 includes obligations of any local currency Sovereigns; obligations of foreign currency Sovereigns, Agencies, other official entities and Multilaterals rated at least AA-; INVESTMENT ASSETS UNDER Corporates and Asset Backed Securities rated at least AAA; deposits with HORIZON MANAGEMENT banks rated at least A-; and a broad range of derivatives. 5 years USD 2,169 million ASSET ALLOCATION USD Model Portfolio 5 can be invested in one or more of six underlying strategies (known as Investment Products): Cash, 0-1 year Treasuries, 1-5 year Treasuries, Mortgage Backed Securities, LIBOR Plus and Equities. The overall asset allocation of USD Model Portfolio 5 is determined by the World Bank Treasury’s Investment Management Department (IMD) with the aim of maximizing returns while remaining within its risk constraints. Figure 9: Asset Allocation of Model Portfolio 5 Allocation by Investment Product (%) Allocation by Asset Class (%) TIPS 33.7% 30.9% 9% 1-5 year Treasuries 14.2% 16.4% 15% Libor Plus 8.1% 85% Mortgage 2.3% 1.7% 0.7% -8% Backed 0-1 Year Securities Treasuries 27% 16% Sovereign Government Agency Covered Bonds ABS MBS Supra / Multilaterals Swap / FX Swap Cash Equities BENCHMARKS Each of the four Investment Products within USD Model Portfolio 5 has a benchmark, against which any limits related to relative risk and return for each Investment Product are measured. The Investment Products and their corresponding benchmarks are as follows: Strategy Benchmark 0-1 Year Treasuries Bank of America/Merrill Lynch US Treasuries 0-1 Index 1-5 Year Treasuries Bank of America/Merrill Lynch US Treasuries 1-5 Index TIPS 5-10 year US TIPS Index Mortgage Backed Securities Bloomberg US MBS Index Libor Plus Bank of America/Merrill Lynch USD 3-Month LIBID Average Index Developed Market Equities MSCI World Index - Hedged * The negative allocation to cash and cash equivalents is a result of repurchase agreements that are used to purchase yield enhancing securities. RISK STATISTICS Generating enhanced investment returns while adhering to the investment objective of capital preservation and ensuring sufficient liquidity to meet foreseeable cash flow needs is undertaken within a conservative risk management framework which limits the estimated average loss to the portfolio in the worst 1% of loss events. This Conditional Value-at-Risk (CVaR) measure is the primary risk constraint used in the management of Model Portfolio 2. The overall market risk within Model Portfolio 2 is constrained by a CVaR measure as follows: 99% CVaR of no greater than -100 basis points. The World Bank Treasury continually monitors the asset allocation of Model Portfolio 5 to ensure it best represents the investment objective of the portfolio while remaining within the relevant risk parameters. A team of investment professionals analyzes market movements and macro-economic trends carefully and stress tests each Model Portfolio against two possible future scenarios: the current scenario in which the model assumes that interest rates will remain unchanged over the investment horizon, and the forward scenario in which the model assumes that yields will converge to forward rates (estimated using the Nelson-Siegel model). As of 30 June 2018, the CVaR for Model Portfolio 5 at 99% confidence interval under the current and forward scenarios was 4.92% and 6.02% respectively, both well within the risk constraint. HISTORICAL RETURNS The chart below shows the historical investment performance of USD Model Portfolio 5 over the past 5 years. Since inception, Model Portfolio 5 has never incurred an investment loss over its investment horizon although it may go through periods where it incurs negative returns. Figure 10: Asset Allocation of Model Portfolio 5 108 0.80% 107 106 0.60% Indexed Cumulative Return 105 Monthly Return % 104 0.40% 103 102 0.20% 101 100 0.00% 99 98 -0.2% 97 96 -0.40% Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 USD Model Portfolio 5 (RH Axis) USD Model Portfolio 5 Cumulative Indexed Return (LH Axis) USD Model Portfolio 5 Benchmark Cumulative Indexed Return (LH Axis)