Report on the Investment of Israel's Foreign Exchange Reserves in 2018
The annual report on the investment of Israel's foreign exchange reserves for 2018 was published today. Following are the main points in the report:
1. Israel's foreign exchange reserves totaled $115.3 billion at the end of 2018, an increase of $2.3 billion over the course of the year.
2. At the end of 2018, the level of reserves was slightly above the upper bound of the range of the appropriate level of reserves that was set, of $70–110 billion, and remained stable at 31 percent of GDP.
3. In 2018, on average, 63.4 percent of the reserves were invested in government assets, 12.8 percent in equities, 5.9 percent in corporate bonds, 11.8 percent in long term bonds of other public entities, and the remainder were invested in short term assets.
4. The holding rate of return on the reserves portfolio in 2018 was 0.18 percent in numeraire terms, which is a basket of currencies—primarily comprised of the dollar and euro. The portfolio’s rate of return was lower than in recent years, mostly due to equity market declines in the final months of 2018.
Holding rate of return on the foreign exchange reserves portfolio, from annual and multiyear perspectives, 2014–18
Actual portfolio return
5. The excess return vis-à-vis the benchmark rate of return was -0.87 percent in 2018. The investment in equities reduced thereturn
by 1.1 percent, while in contrast, a duration longer than the benchmark’s duration and the decline in the yield to maturity in the
euro portfolio, together with short-term investments in the dollar portfolio, made a positive contribution of 0.27 percent.
6. The loss this year due to investment in equities reflects the risk inherent in investment in assets that are relatively risky compared to government bonds but that have a higher expected return over the medium and long term. This is within the framework of the risk level authorized by the Monetary Committee. From a multiyear perspective, over the last 5 years, the portfolio’s actual return performed better than the benchmark by almost a full percentage point in annual terms.
7. The Bank of Israel’s decision to invest part of the foreign exchange reserves in equities was made in 2012, with a long term view, against the background of the increase in the level of the reserves and the low interest rate environment. The share of investment in equities increased gradually to approximately 12.5 percent. Since then, the investment in equities contributed approximately 66 percent of the total overall excess return.
8. In the beginning of 2019, the Monetary Committee approved a new version of the investment policy guidelines—the maximum level of risk, CVaR(5%), over a one year horizon, was increased from 400 basis points to 475 basis points. The importance of achieving the goal of maintaining the reserves’ purchasing power also in the medium term was emphasized, and the maximum share of investment in equities was increased from 15 percent to 17.5 percent; the asset allocation for 2019 was determined within the framework of the new version of the guidelines.