Excerpts from the presentation of Juan Foxley-Rioseco at the NALM Seminar for Central Banks (Singapore, July 2013)
Correlations from historical data suggest that better risk-return frontiers seem achievable if going into local government bonds issued in non-anchor currencies. In fact, Central Banks and Sovereign Wealth Funds are improving their risk-return management by doing exactly that. They should continue to do so as long as liquidity and/or credit risk constraints would not become binding.
As we learned from basic portfolio theory, correlations are much more important than individual asset volatility when it comes to appoint suitable candidates for lowering the risk of an asset basket. The lower the better, ideally negative.-