Cash and nominal government bonds facilitate regular operational needs and can be quickly deployed to fulfil urgent liquidity needs under stressed conditions. Advanced economy inflation-linked bonds are less liquid than nominal bonds but provide inflation protection. Equities provide exposure to long-term growth assets with higher return potential but also with higher risk. MAS’ investment horizon is longer than that of many central banks. This has given MAS the flexibility to invest in more volatile (and longer ‘duration’) asset classes beyond fixed income, including equities. Both the risk management framework and strategic asset allocation are approved by the MAS Board of Directors and reviewed regularly. Efficient investment process MAS strives to achieve an efficient investment process, underpinned by two elements: one, judicious benchmark selection and customisation; and two, tapping on specialised external investment expertise First, benchmark selection. MAS uses asset class benchmarks to represent the investment universe and risk profile of each asset class that can be easily replicated, to evaluate its investment performance. These benchmarks could be market-capitalisation weighted or customised. For some asset classes, we have chosen to apply certain customisations to marketcapitalisation weighted benchmarks, guided by considerations of liquidity, stability, and concentration risk. 5/7  BIS central bankers' speeches  One area we have applied customisation is in the fixed income asset class, where it is relatively more important to guard against concentration risk. This is because the response to credit risk is more asymmetric for fixed income than for equities.
Three types of stress tests are conducted: Historical: Shocks are applied to the portfolio using asset price movements seen in historical stressed episodes, such as the Global Financial Crisis, 2000 dot-com bust, 1994 bond market selloff, etc. Vulnerability-based: The portfolio is subject to hypothetical scenarios which stress in turn each of the portfolio’s risk factors such as equity, interest rate, credit, inflation, and foreign exchange. Thematic: These are forward-looking stress tests and are designed by taking into account prevailing market conditions and potential risk events on the horizon. 4/7  BIS central bankers' speeches  Depending on the stress test results, MAS will consider appropriate responses and portfolio adjustments when needed. The risk management framework is reviewed on a regular basis to ensure it remains fit-forpurpose. Balanced asset allocation Subject to the liquidity and risk tolerance thresholds, MAS seeks to achieve good long-term returns on the OFR through a balanced asset allocation. MAS invests the OFR in a well-diversified portfolio, probably more diversified than is the case for most central banks. The portfolio is geographically diversified across advanced and emerging market economies, with investment-grade bonds in advanced economies making up the largest share. The portfolio is diversified across asset classes – in cash, bonds and equities. The portfolio has a diversified currency mix, with about three-quarters of the OFR denominated in US Dollars, Euros, Japanese Yen and Pound Sterling, with the US Dollar forming the bulk. Each asset class in the portfolio serves a function.