- Clear investment rules can enhance natural resource fund investment performance, limit excessive risk-taking and help prevent mismanagement of public resources.
- A fund’s policy objective (e.g., saving resource revenues for the benefit of future generations; providing a source of short-term financing to stabilize volatile budgets) should inform its target financial return (e.g., 3-5 percent per year), which is an implicit statement of the fund’s risk appetite.
- Most natural resource funds are governed by a set of detailed investment rules that constrain investment decisions. These generally include a target asset class allocation (percentage of investments in cash, fixed income, equities and alternative assets), restrictions on domestic investment, restrictions on risky asset purchases, and restrictions on the use of natural resource funds as collateral to guarantee public debt.
- In practice, there is significant scope for tailoring a natural resource fund’s rules-based investment strategy to a country or region’s specific needs, expertise and context. However, a large degree of discretion over investments is likely to lead to patronage or mismanagement.