Santiago Principles Self-Assessment

The Pula Fund

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  • Pillar 1: Legal
  • Pillar 2: Institutional
  • Pillar 3: Investment
Principle 1

1. The legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objective(s).

1.1. The legal framework for the SWF should ensure legal soundness of the SWF and its transactions.

1.2. The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed.

Botswana is among the founding members of the International Forum of Sovereign Wealth Fund (IFSWF) and was one of the architects of the Santiago Principles in 2008.

The Pula Fund was established in 1993 and the legal framework supporting the Fund was promulgated in 1996 when the Bank of Botswana Act was amended. The Pula Fund is managed in accordance with Section 35 of the Act stipulating the establishment and the management of long-term investment funds.

The management of the Pula Fund is entrusted to the Bank of Botswana to ensure the legal soundness of the Fund and its transactions. The Bank of Botswana assesses the needs for primary international reserves (invested in the Liquidity Portfolio) to accomplish its principal objectives. The assets in excess of what is needed for reserves adequacy are invested in the long-term (Pula Fund) in consultation with the Ministry of Finance and Development Planning (MFDP).

The Government of Botswana invests directly in the Pula Fund and its assets are accounted for in the Government Investment Account, which represents the government’s ownership of the Pula Fund.  The legal specifications for such activities are detailed in the Act.

Principle 6

6. The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.

The governance structure is detailed in Part IV of the Bank of Botswana Act.

A three-tier structure is followed in terms of governance:

  1. the Board of the Bank of Botswana has overall responsibility for the management of the Pula Fund. The Board includes a member from the MFDP representing the government ownership of the Pula Fund. Other members of the Board include the Governor of the Bank of Botswana and 7 independent non-executive directors. The Board approves the investment policy and establishes the overall strategic asset allocation of the Pula Fund and defines discretionary ranges for tactical asset allocation.
  2. the Investment Committee decides on the execution of the investment strategy, including tactical deviations from the board-approved strategic asset allocation. The Investment Committee is chaired by the Governor and includes investment experts from the Financial Market Department. The performance of the internally managed Pula Fund is reviewed by a separate Department (Finance Department) with dedicated responsibility in this area over and above the monthly and quarterly performance reports prepared independently by the custodian.
  3. the Financial Markets Department executes the investment strategy and ensures that the desired asset allocation is attained in financial markets, using both internal management and external managers. All the activities of the Pula Fund are regularly reported to the Board to ensure operational compliance with the agreed investment strategy.
  4. the back office functions are performed by a separate Department (Payments and Settlement Department) in line with international best practice on segregation of duties.

The existing Bank organisation structure, as at April 2014, is illustrated in the figure below.

Principle 18

18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.

18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.

18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.

18.3. A description of the investment policy of the SWF should be publicly disclosed.

The investment policy and guidelines for the management of the Pula Fund are underpinned by the objectives of preserving the purchasing power of assets, maintaining liquidity at all times and maximising return within acceptable risk parameters.

Periodically, the entire investment strategy and strategic asset allocation are subjected to a review and all investments, both internally and externally managed, are done in accordance with investment guidelines approved by the Board in consultation with the MFDP. This consultation process ensures that the owner’s risk tolerance and investment objectives are reflected in the agreed investment strategy.

The investment strategy does not allow the use of leverage and places emphasis on the application of sound risk management practices.

The Pula Fund is invested using both internal and external managers with specific guidelines and precise benchmarks for the measurement and assessment of investment performance. The global custodian assists with performance data, which are reconciled with external fund managers and subjected to performance attribution analysis. Furthermore, an external portfolio consultant assists in the monitoring of the externally managed funds.

On a quarterly basis, the performance report is submitted to the Board for monitoring and any remedial action that may be necessary.

The Bank’s investment policy is guided by key objectives of safety, liquidity and return.  The details are contained in the Annual Report.