Chile Funds - Summary

May 09, 2013

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Since the nationalization of Chile’s copper mines in the 1970s, successive Chilean governments have tried to shelter the South American nation’s economy, which is inseparably linked to commodity prices, from periods of high growth and inflation known as Dutch disease. The first attempt was in 1985 with the establishment of the Copper Stabilization Fund (CSF) to accumulate copper revenue when prices were high, thereby supplementing the Chilean budget when prices fell. For example, during the 1997–’98 Asian financial crisis, Chile withdrew $200 million from CSF and helped avoid a recession by distributing it domestically.

In 2006 then–president Michelle Bachelet’s government overhauled Chile’s finances and replaced CSF with two new sovereign wealth funds, the Pension Reserve Fund (PRF) and the Economic and Social Stabilization Fund (ESSF). The Ministry of Finance delegated fund management to Banco Central de Chile (BCC), which had experience in investing foreign reserves.

PRF is a savings fund that helps the government meet its future pension liabilities. Specifically, the fund backs government guarantees of basic pensions and welfare contributions for low-income pensioners. Contributions to PRF have priority over any other use of any government surplus, and the fund cannot be used before 2016.

ESSF replaces CSF; its main purpose is to reduce the volatility of government revenue, which largely depends on copper and molybdenum prices. ESSF’s funds grow in good economic times, guarding against currency appreciation and high inflation and building a rainy-day fund for downturns. For example, during the 2008–’09 global financial crisis, Chile recovered much faster than the U.S. and Western Europe because drew down more than $9 billion from ESSF in 2009, making up for missed tax revenue due to low copper prices and economic contraction.

ESSF plays the vital role of financing the annual contribution to the PRF in a cascade effect, so that pension’s savings accumulation through PRF have priority over any other surplus fund.

The Chilean government enshrined the foundations of and procedures for running ESSF and PRF in law, leaving little leeway when it comes to investment management. Both funds are primarily invested in liquid foreign sovereign debt instruments.

Chile’s Finance Ministry was one of the main promoters of the International Forum of Sovereign Wealth Funds. It also promoted the Santiago Principles, a voluntary code of governance and transparency guidelines that the original group of sovereign wealth funds signed on to at a 2008 meeting in Santiago, the Chilean capital.

Pension Reserve Fund (PRF) Economic and Social Stabilization Fund (ESSF)
Target Asset Allocation

  • Sovereign bonds 48%
  • Corporate bonds 20%
  • Inflation-linked bonds 17%
  • Equities 15%
  • Sovereign bonds 74%
  • Money market instruments 15%
  • Inflation-linked bonds 3.5 %
  • Equities 7.5%



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