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Financial Crisis and
the Global Fund’s Investments
Presentation to the Global Fund Board
November 7, 2008
Trustee, World Bank
1
V.1
Bubble Bursts on Subprime Market
Source: Inside Mortgage Finance
Source: Office of Federal Housing Enterprise Oversight Mortgage Bankers
Association, as reported by the Federal Reserve Bank of San Francisco
Huge financial institution losses
Banks deleverage
2
Financial Markets in Turmoil: Events
 Bear Stearns insolvent, JP Morgan buys it with support from the
US Federal Reserve. [March 16]
 US Government places Fannie Mae & Freddie Mac under
conservatorship. [September 7 ]
 Lehman in bankruptcy, lots of toxic assets with no buyers; Merrill
Lynch folded into Bank of America to avoid a run. [September 14]
Further erosion of confidence.
 US Federal Govt extends $85 billion to AIG [September 16]
 Morgan Stanley & Goldman Sachs convert to bank holding
companies – take deposits, buy/merge with other financial
institutions [September 21]
All 5 major broker dealers are gone – within 6 months
3
Nov-07
Nov-08
Nov-06
Nov-05
Nov-04
Nov-03
Nov-02
Nov-01
Nov-00
Nov-99
Nov-98
Nov-97
Nov-96
Nov-95
Nov-94
Nov-93
Nov-92
Nov-91
Nov-90
Nov-89
Nov-88
Significant Losses in the Equity Markets
S&P 500 Index
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
4
11/1/08
10/1/08
9/1/08
8/1/08
7/1/08
6/1/08
5
5/1/08
6
4/1/08
3/1/08
2/1/08
1/1/08
12/1/07
11/1/07
10/1/07
9/1/07
8/1/07
7/1/07
6/1/07
5/1/07
4/1/07
3/1/07
2/1/07
1/1/07
12/1/06
Yield (%)
LIBOR Spread has Widened
7
US 3 month T-bill
US 3 month LIBOR
4
3
2
1
-
5
Comparison with Other Market Returns
Major Market Indices (Returns in USD)
2007
CYTD
September 30, 2008
MSCI World
9.57%
-23.84%
S&P 500 Index
5.49%
-19.29%
UST 1-5 Index (ML)
8.16%
4.28%
US MBS Index (Lehman)
6.90%
3.83%
US Corporate Bond Index (ML)
5.37%
-7.19%
US Lehman Aggregate Index
6.97%
0.63%
Global Fund Investment Portfolio
6.89%
3.44%
EQUITIES
FIXED INCOME
6
What are the Implications for the
Global Fund Investment Portfolio?
7
Conservative Risk Parameters
Preservation of principal is paramount objective.
 Investment strategy is designed to minimize
vulnerability to negative returns.
 High-quality credit assets (subset of those authorized
for IBRD and IDA).
8
Changes to Adapt to the Financial Crisis
Since June 2008
Shortened duration*

From 1.75 years to 1.25 years.
Reduced bank exposures.

From 62% to around 50%
* Duration of non-working capital and non-MBS components.
9
Global Fund Trust Fund Returns
Global Fund TF Returns relative to US 2Y Yields
2002 - 2008
%
8
CY07
6.89%
7
6
CY06
4.54%
CY02
4.84%
5
4
CY04
2.16%
CY03
1.70%
3
CY05
2.52%
CY08
3.44%
2
1
Aug-08
May-08
Feb-08
Nov-07
Aug-07
May-07
Feb-07
Nov-06
Aug-06
May-06
Feb-06
Nov-05
Aug-05
May-05
Feb-05
Nov-04
Aug-04
May-04
Feb-04
Nov-03
Aug-03
May-03
Feb-03
Nov-02
Aug-02
May-02
Feb-02
0
On January 31,2005, the assets of Trust Funds were converted into two separate tranches. GFATM participates in both tranches.
CY05 return includes pre-tranche returns for January 2005.
The return shown above for 2002 to 2004 is for the total Trust Funds (includes GFATM).
CY08 return is not annualised and is for the period to 30 September 2008.
10
Investment Income Earned by Global Fund
700
6
Investment Income
5
Cumulative Income
Liquidity Balance
500
4
400
3
300
2
200
1
100
0
2
CY
Balance in USD Billions
Investment Income in USD Millions
600
0
002
2
CY
003
2
CY
004
2
CY
005
*Note: CYTD income through September 30, 2008
2
CY
006
2
CY
007
YT
008
2
D
11
Conclusion
 Continuing prudent management of Global Fund
funds.
 Anticipate lower returns in low yield environment.
12
Additional Slides
13
Illustrative Performance Comparison
1H 2008 return (annualized)
Last 3 years
Average annual return
Volatility
Frequency of negative returns
Last 5 years
Average annual return
Volatility
Frequency of negative returns
Portfolio 1
Portfolio 2
UST & MBS (70:30) Equities
& Bonds (60:40)
*
4.08%
-13.68%
Portfolio 3
Endowment
-12.44%
4.7%
2.4%
0.0%
3.6%
5.5%
16.7%
5.3%
6.0%
16.7%
3.6%
2.2%
0.0%
5.0%
5.5%
10.0%
7.8%
6.4%
10.0%
Note:
Portfolio 1 comprises of 70% Merrill Lynch US Treasuries 1-3 Index and 30% US MBS
Portfolio 2 comprises of 40% US investment grade bonds (Lehman Aggregate Index) and 60% US equities
Portfolio 3 comprises of 45% public equities, 20% investment grade fixed income, 15% hedge funds, 12% real estate and 8% private
equity
Based on quarterly data from Bloomberg, LehmanLive.
14
EUR/USD FX Rates
Since the beginning of the 2008, the USD has strengthened by approximately 15%
from 1.45 EUR/USD as of January 1, 2008 to 1.24 EUR/USD on October 29, 2008.
EUR/USD FX Rates
(Jan. 1, 2008 - Oct. 29, 2008)
1.7
1.6
1.5
1.4
1.3
10/01/2008
09/01/2008
08/01/2008
07/01/2008
06/01/2008
05/01/2008
04/01/2008
03/01/2008
02/01/2008
01/01/2008
1.2
15
US Treasury Yield Curve has Steepened
Aggressive Fed rate cuts and flight to quality have driven the
steepening of the yield curve
4.50%
4.00%
3.50%
3.00%
2.50%
31-Dec-07
03-Nov-08
2.00%
1.50%
1.00%
0.50%
0.00%
0.25
1
2
3
4
5
In years
6
7
8
9
10
16
Donor Contributions
Amount received in USD million
$11,819
$9,648
$6,752
$4,734
$3,319
$2,045
$2,895
$2,171
$2,019
$1,343
$1,274
$1,414
CY 2003
CY 2004
CY 2005
$702
CY 2002
CY 2006
CY 2007
Calendar Year (CY)
Annual contributions
CY 2008
Jan-Sepr08
Cumulative contributions
17
Grant Commitments
$9,508
Value of commitments in USD million
$7,796
$5,329
$3,482
$1,959
$2,467
$1,108
$1,847
$1,712
$1,524
$1,101
$7
CY 2002
CY 2003
$851
CY 2004
CY 2005
CY 2006
CY 2007
CY 2008
Jan-Sepr08
Calendar Year (CY)
Annual commitments
cumulative commitments
18
Disbursements to Principal Recipients
Disbursement to PR in USD million
$6,346
$4,964
$3,235
$1,912
$1,730
$845
$1,381
$1,323
$1,067
$232
$1
$231
CY 2002
CY 2003
$613
CY 2004
CY 2005
CY 2006
CY 2007
CY 2008
Jan-Sepr08
Calendar Year (CY)
Annual disbursements
Cumulative disbursements
19
Transaction Volumes
Volume of commitment and disbursement
transactions
4341
3573
2445
1554
840
887
357
686
565
651
370
8
202
139
113
149
205
241
117
CY 2002
CY 2003
CY 2004
CY 2005
CY 2006
CY 2007
CY 2008
Jan-Sepr08
Calendar Year (CY)
# of annual commitments
# of annual disbursemetns
Cumulative # of transactions
20