ROME - United Nations agencies are better known as disbursers of cash than managers of it.
But the International Fund for Agricultural Development, based in Rome, has developed an innovative program for outsourcing 75% of its $2 billion cash hoard.
While other UN agencies manage their cash internally pending disbursement, last year the IFAD hired 14 fixed-income managers to run $1.5 billion. What makes IFAD's situation unique is how each manager's benchmark is tied to one of five different base currencies.
The agency makes 50-year loans at concessional rates to help poor, rural countries improve food production and overall living standards. Its annual lending program amounts to about $350 million.
Traditionally, IFAD officials had managed the assets internally. Assets were invested largely in bonds reflecting the five underlying currencies in special drawing rights, in which the agency makes its financial commitments. But the arrival of Fawzi Al-Sultan as the agency's new president in early 1993 heralded a change. Mr. Al-Sultan, formerly a Kuwaiti banker and a board member of the World Bank, instituted a more creative approach, said Tor Myrvang, the agency's treasurer.
First, State Street Bank & Trust Co., Boston, was hired as global custodian, though direct contact is through the bank's Munich operation. With the help of Cambridge Associates' Boston and London offices, IFAD last year outsourced $1.5 billion to 14 external bond managers, including J.P. Morgan Investment Management Inc., London; Deutsche Asset Management, Frankfurt; Morgan Stanley Asset Management, London; Commerz International International Capital Management GmbH, Frankfurt; Portman Asset Management PLC, a unit of The United Bank of Kuwait PLC, London; and CPR Gestion, Paris.
The remaining $500 million is invested internally by Abdou Bousselham, a treasury officer. Most of those assets are in a short-term portfolio that funds IFAD's cash needs. The agency receives advice from Potomac Capital Inc., New York.
The benchmark for the external managers is the J.P. Morgan Global Bond Index. The tricky part is that each manager's benchmark is based in one of the five base currencies contained in the special drawing rights, resulting in markedly different benchmark returns, Mr. Myrvang said. The weighting of the currencies now is about 40% dollars, 20% yen, 20% deutsche marks, 10% French francs and 10% sterling.
While each manager is free to invest in government bonds in 13 different markets and obligations of certain supranational bodies - such as the International Bank for Reconstruction and Development - the manager may hedge back into its base currency.
Initially, the external managers were given either hedged or unhedged benchmarks. At the beginning of this year, all managers were switched to hedged benchmarks to ease administration.
The treasurer credited State Street Bank with handling the agency's unusual need for operating in five different base currencies. The jury is still out on performance. For the year through Aug. 30, the managers collectively trailed the benchmark by 22 basis points - compared with an 88-basis-point deficit at the end of June.
The shortfall is no great surprise because managers' average duration at the beginning of the year was lower than the five-year duration for the benchmark, Mr. Myrvang said. IFAD may spawn imitators: the agency's progress is being closely watched by two sister UN agencies: the Food and Agricultural Organization and the World Food Program.
