Core Focus: The governance of performance measurement, the transparency of performance reporting, the use of external managers, and the challenges of integrating internally and externally managed assets into a single performance framework.

In-Depth Notes:
The governance and transparency of performance measurement are critical for accountability. The CBUAE’s framework, for example, provides a model of governance where the board approves the investment policy and SAA, and the monetary and reserve committee approves investment guidelines and oversees the reserve management function . The risk committee ensures all risks are monitored, while a separation of duties and straight-through processing creates necessary controls and checks and balances .

Transparency and Reporting:
Performance results are typically reported to senior management and the Board on a regular basis. The ECB, for example, transmits a general report on the investment activities and risks to the Governing Council once a year, including the individual performance figures and rankings . This ensures that performance is subject to appropriate oversight.

The Use of External Managers:
The CBUAE, for the first time, allocated assets for investment by external fund managers to compare the risk-adjusted returns generated by its internal reserves management team with the performance of private-sector counterparts . This interaction is expected to broaden the institution’s investment insights and analysis. The Bank of Israel uses Aladdin to integrate internally and externally managed assets into a single, consistent view of risk and return. Previously, it had no single and consistent view of risk and return across internally and externally managed assets .

The Challenge of Benchmarking Complex Portfolios:
The New Zealand approach to benchmarking hedged reserves highlights the complexity of measuring performance for portfolios that involve long-dated borrowing . The Bank borrows foreign currency to fund investments primarily in US, European, and Japanese sovereign debt markets. The SAA for hedged reserves is defined such that reserve managers can adjust the allocation dynamically to take advantage of favourable funding spreads. Performance is carefully measured, but it is not compared to a benchmark (given the complexity of benchmarking long-dated borrowing that is transacted on an irregular basis) .

The Need for Continuous Review:
Performance measurement frameworks are not static. They are reviewed periodically to ensure they remain fit for purpose. The CBUAE’s new investment approach, approved in November 2020, incorporated new asset classes and the use of external managers . The Bank of Israel’s adoption of Aladdin in 2019 provided a more sophisticated and holistic view of risk and return across internally and externally managed assets . This continuous evolution reflects the changing environment for reserve managers and the need to refine performance measurement frameworks to keep pace.