Traditionally, pension funds are conservative investors that prefer investment security. In this regard, the long-term goal of the Reserve Fund is to achieve the structure of the portfolio where the dominant participation will be held by debt securities, instruments of the money market and bank deposits. During realization of the set investment goals, we are guided by the principles of security and liquidity of the Fund’s assets, risk diversification and, of course, the profitability principle. In short, this means that we are trying to invest in financial instruments of issuers with low risk that make yield in order to disperse risk with the tendency to ensure regular cash inflows to settle all current and estimated future liabilities that the Reserve Fund has.
We are aware of the fact that from the establishment till today, the amount of dividend in the amount of BAM 42 million for payment of pensions – is modest. However, with the support and trust given to us by the Republika Srpska Government, the competent ministries and with the understanding and motive we receive from the Pension Fund, we are trying to increase the amount of dividends. We believe that we will create even more stable and even more profitable portfolio, in that way, taking even more important role in supporting the compulsory pension insurance in the Republika Srpska. Also, we are proud of the fact that the Republika Srpska Prime Minister, Mr. Radovan Višković, praised our management model in his exposé, which gives us a new encouragement to continue our activities in order to create a more stable and more profitable portfolio, thus providing a more important role in supporting the mandatory pension insurance in the Republika Srpska. In this regard, the amount that we paid as a dividend in April last year represents a significant outflow of funds from the PREF, but we will try to make payments on this basis even greater in the future.
The results and effects of our previous activities should be considered in the context of developments in the domestic capital market. Since the beginning of 2011, the stock market index and the energy sector company index have lost about 40% of the value. Given that companies from the stock exchange index and the energy sector make up the largest part, i.e. almost one third of the total assets of the Fund, the loss of value has affected the achieved result and performance of the PREF. At the same time, adherence to the International Accounting Standards and the Precautionary Principle forced us to accept as expenditures in the income statement a part of the negative revalorization reserves relating to the companies in which bankruptcy has been opened and where the expectations of bankruptcy arise. Since the establishment of the Fund, so far the total amount of write-offs on this basis is larger than 30 million convertible marks. On the other hand, more than a third of the assets of the Fund is in bonds issued by the Republika Srpska or its municipalities. We try to increase the participation of bonds in portfolio through the process of portfolio restructuring. In this way we increased the value of liquid assets with stable yields. At the end of 2018, the amount of high-liquid and safe assets that makes stable yield, along with deposits, makes for about 40% of the portfolio’s assets. Taking this into account, in the period from the beginning of our work, we sold our shares to more than 220 issuers by making an inflow of 23 million convertible marks.
Through the process of transparent restructuring of the portfolio, the assets from the sale of shares and dividend income were invested in bonds, treasury bills and deposits. In conditions of fall of interest rates, both on foreign and domestic market, as well as negative interest rates abroad, as well as on the surrounding stock exchanges, the effects of adequate and timely recognized trends in the previous period, as well as efforts, knowledge and the skills of the entire team of the PREF Management Company reflected on the PREF portfolio. In this regard, we believe that with this portfolio structure we have provided adequate liquidity and we are ready to meet future challenges.
In addition to the activities related to the restructuring of the portfolio, we devote considerable attention to improving corporate management in companies from the PREF portfolio. In the future, we will continue with the process of restructuring the PREF portfolio, which implies the sale of shares for which we do not expect that acceptable yield will be provided within a reasonable time or we consider that there are big risks that these shares carry with themselves, and investments in debt securities of which the income is realized by interest.
In the future, we plan to invest in REPO contracts and joint ventures, modelled on the establishment of the Voluntary Pension Fund Management Company. Also, through participation in the work of the Management and Supervisory Boards in companies from the PREF portfolio, we will try to be involved in the business and to support the achievement of better business results of these companies.
Finally, we wish, with our results to justify the given trust and we will try to further improve good relations with domestic and international financial institutions and with companies from our portfolio in order to achieve the best possible results.
Author: Miloš Grujić, Chief Executive Officer, The Management company of The Pension Reserve Fund of the Republika Srpska