Investment. Policy. FundoSoberanodoBrasil AnnexIofCDFSBResolutionnº11

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1 Investment Policy FundoSoberanodoBrasil AnnexIofCDFSBResolutionnº11

2 Investment Policy Fundo Soberano do Brasil Annex I of CDFSB Resolution nº11

3 DELIBERATIVE COUNCIL OF FUNDO SOBERANO DO BRASIL Guido Mantega Miriam Belchior Alexandre Tombini President of the CDFSB Counselor of the CDFSB Counselor of the CDFSB EXECUTIVE SECRETARY OF THE CDFSB Arno Hugo Augustin Filho TECHNICAL STAFF Under Secretary of Planning and Fiscal Statistics Cleber Ubiratan de Oliveira Head of Fundo Soberano do Brasil William Baghdassarian * Deputy Head of Fundo Soberano do Brasil Daniel de Araujo e Borges Carlos Oswaldo B. Gadelha Filho Dorilene Gomes Milanez Eduardo Brandão Curi Fabio Pereira Simoni da Silva Leonardo Tavares Lameiro da Costa Marcus Lima Franco Marcus Vinicius Magalhães de Pinho Ricardo Milsztajn FSB Accountant Silvia Lenita Moeller Central Bank of Brazil Representatives in the FSB Aldo Luiz Mendes Ricardo Franco Moura Ministry of Planning, Budget and Management Representatives in the FSB Esther Dweck Martim Ramos Cavalcanti * Technical coordination Cover and graphic design Helise Oliveira Gomes Cover photography Honestino Guimarães National Museum. Photo by Florian Knorn, under CreativeCommons license. INFORMATION: General Coordination of Fundo Soberano do Brasil (COFSB) Phone: Fax: NATIONAL TREASURY SECRETARIAT - STN Edifício Sede do Ministério da Fazenda, Esplanada dos Ministérios, Bloco P, 2 andar Brasília DF fsb@fazenda.gov.br Home Page:

Soberano do Brasil Daniel de Araujo e Borges Carlos Oswaldo B.

4 Investment Policy of the Fundo Soberano do Brasil The Investment Policy of the Fundo Soberano do Brasil - FSB reflects the guidelines and competencies disciplined by article 6 of Law No. 11,887, of December 24 th, 2008, by Presidential Decree No. 7,055 of December 28 th, 2009 and Presidential Decree No. 7,113 of February 19 th, 2010 and is based on four tiers: a. Governance; b. Benchmark Portfolios; c. Operational Limits for Portfolio Management; and d. Mechanisms and Methodologies for Measuring the Results of the FSB. The long-term planning of the FSB is supported by an institutional mission, a strategic vision, a set of values that clarify to society the objectives expressed in article 1 of Law No. 11,887, and an investment philosophy that guides the asset allocation. Institutional Mission of the FSB Manage long-term public savings, which allows the FSB to act, effectively, as an instrument of economic policy aimed at mitigating the effects of economic cycles in Brazil Strategic Vision of the FSB Consolidate until 2023, as an effective instrument to manage sovereign wealth and to mitigate the effects of economic cycles in Brazil Principles that Guide the Management of the FSB Assets Prudence, Excellence, Transparency, Integrity and Socio-environmental Responsibility Investment Philosophy of the FSB The search for resource allocations that reconcile, on one hand, maximum expected return, compatible with risk tolerance levels that are consistent with the long-term profile of the Fund, and on the other hand, the maintenance of adequate financial liquidity levels for the short run, aiming to act, timely and effectively, as an instrument of countercyclical economic policy. 3

Benchmark Portfolios; c. Operational Limits for Portfolio Management; and d. Mechanisms and Methodologies for Measuring the Results of the FSB.

5 Governance Structure of the FSB The first tier of the FSB s Investment Policy refers to the detailing of its governance structure. The main legal provisions governing the FSB are Law No. 11,887, Presidential Decrees No. 7,055, of 2009, and No. 7,113, of 2010, the Bylaws of the Deliberative Council of the FSB (Conselho Deliberativo do FSB CDFSB), approved by CDFSB Resolution No. 1, as well as other CDFSB Resolutions. Moreover, in order to comply with the determinations of CDFSB Resolution No. 11, two chambers were created in the governance structure of the FSB: The Technical Advisory Chamber of the FSB (Câmara Consultiva Técnica CCT), in compliance with article 6 of Presidential Decree No. 7,113, and the Investment Planning Chamber (Câmara de Planejamento de Investimentos CPLIN), which aims to guide the decision making process relating to the powers described in article 2, II of the Presidential Decree No. 7,055. In general, it is the CCT that advise, discuss and propose relevant CDFSB Resolutions, while the CPLIN discuss tactical and operational issues related to the implementation of the Investment Policy of the FSB, as well as other determinations of CDFSB 1. Benchmark Portfolios for the FSB The second tier of FSB s Investment Policy is represented by Benchmark Portfolios that serve as references for the optimal allocation of FSB resources, among several investment alternatives, in order to fulfill the purposes set out in article 1 of Law No. 11,887, of its institutional mission, and their risk tolerance level. Three types of benchmark portfolios with specific characteristics are established: a. Domestic Benchmark Portfolio (Carteira de Referência Doméstica - CRD): allocation related to fixed income assets in the portfolio of the Fiscal Fund of Investments and Stabilization (Fundo Fiscal de Investimentos e Estabilização FFIE), which is an instrument used by the FSB to allocate its resources in Brazil; b. International Benchmark Portfolio (Carteira de Referência Internacional - CRI): allocation related to international financial instruments; and 1 For more details of the chambers responsibilities, see CDFSB Resolution No

1, as well as other CDFSB Resolutions. Moreover, in order to comply with the determinations of CDFSB Resolution No.

6 c. Special Portfolios: refer to portions of the portfolio to be managed and monitored separately, due to the implementation of government policies consistent with the purposes specified in article 1 of Law No. 11,887 which may incorporate both domestic and international assets. This investment policy considers two special portfolios: i. Special Portfolio 01 (Carteira Especial 1 - CE1): refers to the set of stocks that are part of the FFIE; ii. Special Portfolio 02 (Carteira Especial 2 - CE2): refers to resources invested in the National Treasury Single Account, as established in article 4 1 of Law No. 11,887. Quantitative information regarding the implementation of this Investment Policy will be presented quarterly in the Performance Report, and semiannually in the Management Report. Operational Limits The third tier refers to a set of operational limits to be observed during the execution of its investment strategy. Those limits serve as instruments of risk control and mitigation, and contribute as well as to align the effective investment portfolio of the FSB to the strategic guidelines of the CDFSB. The main risks monitored are: market, credit, liquidity and operational risks. Furthermore, the operational limits also restrict the concentration of the portfolio regarding asset classes, issuers and financial instruments. The operating limits have strict correlation with an authority policy that establishes three levels of competence and a maximum risk exposure to each level: a. Strategic: level assigned to the CDFSB in order to approve the general investment guidelines, as well as other FSB strategic guidelines. b. Executive: level assigned to the CCT, which aims to ensure alignment of the strategy implemented to CDFSB guidelines; c. Operational: level assigned to the National Treasury Secretariat - STN, as the FSB manager, so it can comply with the Investment Policy approved by the CDFSB, as well as their other determinations. Operational and quantitative aspects related to the third tier of this Investment Policy will be reviewed periodically by the CDFSB and will be in- 5

Special Portfolio 01 (Carteira Especial 1 - CE1): refers to the set of stocks that are part of the FFIE; ii.

7 corporated into the STN information systems for monitoring the investment portfolio of the FSB. Criteria for Performance Measurement The fourth tier refers to the systematic monitoring of FSB results in order to ensure the portfolio is being managed properly, considering the objectives of the Fund. Thus, the performance of the FSB can be measured by an integrated analysis of a set of indicators, including: a. Adjusted Sharpe Ratio - ISA; b. Differential Performance of the Effective Portfolio to the Benchmark Portfolio - RDPR; c. Differential Performance of the Effective Portfolio to the Legal Minimum Return - RDPL; d. Tracking error of the Effective Portfolio - TEPR; e. Performance Assignment Study - EAR; f. Evolution of the Global Portfolio Value at Risk - VaR; g. Stress testing; and h. Backtesting of the Global Portfolio VaR. 6

Fund. Thus, the performance of the FSB can be measured by an integrated analysis of a set of indicators, including: a. Adjusted Sharpe Ratio - ISA; b.

CHANGING INTERNATIONAL INVESTMENT STRATEGIES: THE NEW FORMS OF FOREIGN INVESTMENT IN BRAZIL

9 Originally published by Ipea in January 1982 as number 45 of the series Texto para Discussão. CHANGING INTERNATIONAL INVESTMENT STRATEGIES: THE NEW FORMS OF FOREIGN INVESTMENT IN BRAZIL Eduardo A. Guimarães