The state-owned assets management strategy in lithuania: optimal investment of financial assets

The main purpose of this Master’s Paper is to analyze the assets owned by the state of Lithuania and to determine whether the assets are used effectively. To achieve that, the author elaborates on two main strategical aspects: 1) the strategy of real property management (devised by the Government of the Republic of Lithuania in 2009) and 2) the strategy of financial property management (the Bank of Lithuania‘s official international reserves strategic investment guidelines). The paper consists of three main parts: 1) the theoretical review of literature and other research sources; 2) the methodology of analyzing state assets and constructing the optimal investment portfolio using Harry Markowitz’s model; 3) the author’s research: dynamic analysis of state assets and the Bank of Lithuania’s owned official international reserves, optimizing the portfolio, measuring the value at risk, comparing the structure of the portfolio to theoretical guidelines and discussing the alternative strategies. Theoretical analysis reveals that the assets owned by the state of Lithuania consist of 1) long-term and short-term real assets, 2) intangible assets; 3) financial assets. A high number of institutions in the organizational structure reveal that the country operates on a decentralized asset management model. The real property management strategy document’s main purpose is to centralize the model, following examples of countries like Estonia, by making the Ministry of Finance the key supervisor. Its merits are comprehensive state asset management model analysis, successful appointment of a single leading institution and SWOT analysis. The main drawbacks: lacking control of main goals, such as creating the informative search database of state assets, and ignoring other asset classes, such as financial assets. The strategy of financial assets management in Lithuania can be defined by the Bank of Lithuania’s official international reserves investment portfolio management. Ineffective results from previous years and joining the euro zone suggested major strategic changes, such as adding volatile (and more profitable) shares to the portfolio and significantly increasing investments in non-euro currencies, which elevates currency risk. Results of the practical research reveal that the weight of financial assets in total state assets has doubled in the span of 10 years. A strong correlation between the real GDP growth and the Bank of Lithuania’s financial assets/profitability implies that the effectiveness of financial assets management has a nationally wide impact, however the Bank’s profit/invested value indicator has reached a record low in 2012 – 2013, meaning the previous strategy was highly ineffective. Therefore, the author constructed an optimal and more profitable portfolio, consisting of 19 assets: USA, UK, euro zone (EZ) and Japanese bonds (from government, quasi-government and corporate sectors accordingly), USA, UK, EZ and Japanese share indices and foreign currency spot transactions of USD, JPY and GBP. The portfolio was constructed using daily returns/prices data that covers the span of 18 years (1997 – 2014). The size of the initial investment is 4,14 bn euros and the maximum VaR (possible annual loss) allowed is -100 mln euro/year, as stated by the Bank of Lithuania’s risk budget guidelines. The portfolio yields 4,1 percent annual return at 1,5 percent risk. It consists of 9,85 percent risk-free asset (1 – 6 month German Treasury bills) and 90,15 percent risky assets part, the riskiest being Japanese TOPIX stock index with the standard deviation of 24,6 percent. The addition of foreign currency spot exchanges provides positive results of increasing the return by 0,3 percent (while the risk remains the same), which translates to +12,3 mln. euros annualy. Finally, the portfolio is flexible and simple to reshape into a less risky variant, if the institution predicts the dangers of possible future economic downfalls