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The Petroleum Fund of Timor-Leste was formed by the enactment of the Petroleum Fund Law Number 9/2005 promulgated in August 2005. The intention of the law is that the Petroleum Fund shall contribute to the wise management of the petroleum resources for the benefit of both current and future generations. The Petroleum Fund is a tool that contributes to sound fiscal policy, where appropriate consideration and weight is given to the long-term interests of Timor-Leste’s citizens. The Petroleum Fund is to be coherently integrated into the State Budget and shall give a good representation of the development of public finances. The Petroleum Fund is required to be prudently managed and operate in an open and transparent fashion, within its constitutional and legal framework.

The Government of Timor-Leste, represented by the Minister of Finance, is responsible for the overall management and investment strategy of the Petroleum Fund.

The Petroleum Fund law gives the responsibility to the Central Bank to undertake the operational management of the Fund under an agreement with the Minister. A Management Agreement between the BPA (predecessor of Central Bank of Timor-Leste) and the Ministry Finance was signed in 2005, amended in June 2009 and its annexes 1 and 2 has subsequently amended.  In executing its responsibility, the Central Bank of Timor-Leste established the Petroleum Fund Management Department in August 2005. The Department is headed by an Executive Director accountable to the Governor, and comprises an Investment Division with responsibility for investment management, and a Risk Management Division responsible for performance measurement and to monitor and manage risks. Other divisions of the Central Bank provide support for the Fund’s operations, including Accounting, Settlements, Information Technology and Internal Audit.

The Central Bank commenced Petroleum Fund operations in September 2005 after an opening balance of $205 million was transferred by the Government. The mandate given to the Central Bank in the Management Agreement includes a requirement to passively manage the Fund close to a defined benchmark. Up to June 2009, the whole Fund was managed internally by the Central Bank under a passive mandate. Which were at the time the funds only investing into United States Treasury Market or more commonly known as US Bonds Market.

In June 2009, the first diversification of the Fund took place by appointing the Bank for International Settlements (BIS) as the Fund’s first external manager managing 20% of the Fund . The first BIS mandate was a global portfolio invested in sovereign and supranational bonds in the currencies of United States, United Kingdom, Australia, Japan and Euro. The mandate was subsequently restructured in 2011 to simply cover qualifying instruments (5-10 years US Treasury bonds) and the size was reduced to 10% of the Fund Value in order to allow flexibilities for further exposure in equities. A further diversification, into global equities, took place in October 2010 through the selection of Schroder Investment Management Limited as the Funds’ first equity manager. This mandate was 4% of the Fund and invested in global stocks traded in the world’s largest 23 developed markets.

Given the need for further diversification while the flexibilities in the existing law fully explored and the  law permits for amendment to the investment strategy after 5 years of the Fund’s existence, therefore the  petroleum fund law amended by law number 12/2011 in September 2011. The amended law permits not less than 50% of the Fund shall be invested in “fixed interest”, up to 50% shall be invested in listed equities and up to 5% can be invested in other eligible investments. Following the amendment, further exposure to equities subsequently increased regularly and achieved 40% equities target in June 2014. As part of the diversification, a number of external fund mangers were selected to manage the approved mandates. A further diversification in Developed Market Global Sovereign Bonds ex US took place by selecting two global sovereign bond managers.

The details of the mandates and benchmarks are shown in the table below as well as in the Quarterly Reports published in this website.

Mandate Management  Style Authorized  Manager Mandate Size Tracking Error Out Performance Target Commencement Date
BOA Merrill Lynch 3-5 Years  US Treasury Bond Index Passive BCTL 40.00% n/a Nil 19-Jan-12
BOA Merrill Lynch 5-10 Years  US Treasury Notes & Bond Index Enhanced Passive Bank for International Settlement 10.00% 0.50% 0.25% 15-Dec-11
Barclays Global Treasury Developed Market ex US, 30% Eurozone and 10% Country Capped Enhanced Passive Wellington Management 5.00% 0.50% Nil 4-Dec-14
Barclays Global Treasury Developed Market ex US, 30% Eurozone and 10% Country Capped Enhanced Passive Alliance Bernstein 5.00% 0.50% Nil 3-Jul- 14
Total Fixed Interest 60.00%  

MSCI World Index  Dividents Reinvested

Passive State Street Global Advisor 17.50% 0.35% Nil 18-Jan-12
Black Rock 17.50% 0.35% Nil 21-Feb-13
Enhanced  Passive Schroder Investment Management 5.00% 1.00% 1.00% 7-Oct-10
Total Equity 40.00%  

To ensure transparency, the Central Bank submits Quarterly Reports on the performance of the Petroleum Fund to the Minister of Finance, with the reports being published within 40 days of the end of each quarter. Reports are available on this website. The Petroleum Fund’s Annual Report, which contains a more complete description on the Fund’s activities and its audited financial statements, is published by the Ministry Finance.

Enquires about the BCTL’s role in managing the Petroleum Fund should be addressed to info@bancocentral.tl

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