COMMISSION STAFF WORKING DOCUMENT Accompanying the document Report from the Commission to the European Parliament and the Council on the common provisioning fund in 2021
Date: 2022-05-16
Institutions: Directorate-General for Budget, European Commission
Subjects: EU budget, European Commission, budgetary reserve (EU), financial management, fund (EU), investment, multiannual financial framework

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 16.5.2022  SWD(2022) 143 final  COMMISSION STAFF WORKING DOCUMENT     Accompanying the document Report from the Commission to the European Parliament and the Council on the common provisioning fund in 2021 {COM(2022) 213 final}  
 
 
Table of Contents 

1. 

2. 

INTRODUCTION ............................................................................................................................ 2 

EVOLUTION OF THE CPF PORTFOLIO IN 2021 .................................................................... 2 

FINANCIAL STATEMENTS .......................................................................................................... 3 
3. 
3.1.  Assets of the CPF ................................................................................................................................ 3 
3.2.  Balance sheet ...................................................................................................................................... 3 
3.3.  Asset structure and value of compartments ........................................................................................ 4 
Financial performance ........................................................................................................................ 5 
3.4. 
Statement of financial performance .................................................................................................... 6 
3.5. 

FORWARD LOOKING DIVERSIFICATION.............................................................................. 7 
4. 
4.1. 
Introduction ......................................................................................................................................... 7 
4.2.  Methodology ....................................................................................................................................... 8 
Literature review ................................................................................................................................. 8 
4.3. 
4.4.  Risk and return of a diversified stock and bonds portfolio ................................................................. 8 
4.5.  Risk tolerance and investment horizon ............................................................................................... 9 
4.6. 
Target allocations of similar investors .............................................................................................. 10 
4.7.  Diversification plan ........................................................................................................................... 10 

5. 

CONCLUSION ............................................................................................................................... 10 

 
 
 
 
 
 
 
1.  INTRODUCTION 

This  staff  working  document  (SWD)  accompanies  the  first  annual  report  on  the  common 
provisioning fund (CPF) for 2021. It contains detailed information on the evolution of the CPF 
portfolio, presents the financial statements of the fund, and provides an in-depth analysis of the 
investment  outlook.  In  addition,  it  gives  additional  explanations  on  the  analysis  performed  on 
asset class diversification, which supports the extension of CPF investment to include up to 20% 
exposure to equity. 

2.  EVOLUTION OF THE CPF PORTFOLIO IN 2021 

CPF  is  the  largest  of  the  Commission  managed  portfolios  with  an  asset  value  of  EUR 12.31 
billion  at  year-end.  The  CPF  comprises  several  compartments,  corresponding  to  the  provisions 
for one or several budgetary guarantees established by different EU legislative instruments. The 
currently  active  compartments  include  EFSI,  InvestEU,  EFSD  and  GFEA  (supporting  legacy 
MFA/ELM and  Euratom  operations  under  previous MFFs).  Further  compartments  will become 
active when budgetary provisions are made available for EFSD+ and new MFA loans under the 
current MFF. 

CPF  became  operational  on  1  January  2021  with  the  transfer  of  the  EFSI  Guarantee  Fund 
portfolio worth EUR 8.03 billion at the time. This constituted the total value of the CPF at the 
outset.  The  InvestEU  compartment  was  activated  on  30  June  2021  with  a  contribution  of 
EUR 0.30 billion. On 1 August 2021, the existing portfolios EFSD and GFEA were transferred 
to  CPF  with  a  net  asset  value  (NAV)  as  of  31  July  2021  of  EUR 0.80  billion  and  EUR 2.79 
billion respectively. At year-end, EFSI remains the largest CPF compartment. 

Page 2 / 11 

 
 
 
 
 
3.  FINANCIAL STATEMENTS 

3.1.  Assets of the CPF 

The net assets of the CPF stood at EUR 12.31 billion as at 31 December 2021. The main assets 
were bond securities, classified as fair value  through surplus or deficit (EUR 11.27 billion) and 
cash and cash equivalents (EUR 1.03 billion). Including cash and cash equivalents, current assets 
stood at EUR 3.14 billion. This relatively high share of current assets is necessary to guarantee 
CPF operational capacity and necessary liquidity. 

3.2.  Balance sheet1 

ASSETS 

31 December 2021 
EUR 

NON-CURRENT ASSETS 
Financial assets at fair value through surplus or deficit 

9 165 352 836 

Securities 
Derivatives 
CURRENT ASSETS 
Financial assets at fair value through surplus or deficit 

9 165 352 836 
- 
3 141 276 916 

Securities 

Derivatives 

Receivables 

Cash and cash equivalents 

Current accounts 
  Cash equivalents  
  Accrued interest on cash and cash equivalents 

TOTAL ASSETS  

NET ASSETS AND LIABILITIES 

NET ASSETS 

2 106 297 201 

1 812 602 

363 467 

1 032 803 646 
1 008 293 189 
24 958 876 
(448 419) 

12 306 629 752 

31 December 2021 
EUR 
12 306 420 400 

Contribution from EU Budget 

12 439 736 157 

1 

Since this is the first year of CPF operation only 2021 accounts are available. In the next annual report 
the  balance  sheet  will  include  results  both  for  the  current  year  and  the  previous  year  to  allow  for 
comparison. All amounts are in EUR. 

Page 3 / 11 

 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
                                                      
Retained earnings 
Economic result of the year 

CURRENT LIABILITIES 
Financial  liabilities  at  fair  value  through  surplus  or 
deficit 

Derivatives 

Other payables 

- 
(133 315 757) 

209 352 

- 

209 352 

TOTAL NET ASSETS AND LIABILITIES 

12 306 629 752 

3.3.  Asset structure and value of compartments 

As presented in the CPF annual report, top (AAA) rated securities correspond to  26.8% of total 
assets. Cash and cash equivalents represent 8.4% of the total portfolio value. The average credit 
quality  of  CPF  at  the  end  of  2021  was  A-,  while  the  average  one  year  default  probability  was 
0.07%. The sensitivity of the portfolio to interest rate changes was close to that of the benchmark; 
in particular, the so-called modified duration2 of the portfolio was 3.1, while the duration of the 
benchmark stood at 3.39 at the end of December 2021. 

Figure  1  –  Portfolio  by  rating  (left)  and  portfolio  vs benchmark  split  by  asset  class  (right)  – 
December 2021 

As  mentioned  in  the  introduction,  at  the  end  of  2021  the  CPF  consisted  of  four 
compartments. Each compartment holds a number of CPF units or shares in the CPF of a 
standard size. Changes in the market valuation of the CPF are reflected in the price of the 
units  referred  to  the  Net  Asset  Valuation,  reflecting  the  market  valuation  of  the  assets 
belonging to each compartment at the end of each month. 

The  movements  and  values  are  presented  on  the  in  the  tables  and  graphs  below.  Net 
Asset Values (NAV) are in EUR. 

2 

In simplified terms, a modified duration of 3 means that if interest rates across the maturity spectrum 
rise (drop) by 0.10%, the portfolio value drops (rises) by three times that, namely by 0.30%. 

Page 4 / 11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                      
Compartment  as 
of 31.12.2021 

Contributions  less 
redemptions  2021 
in EUR 

Number of units  Market  Value 

in 

EUR  

EFSD 
EFSI 
GFEA 
INVESTEU 
 Total CPF 

798 238 694 
8 627 829 240 
2 712 886 761 
300 781 462 
12 439 736 157 

80 021 
863 192 
271 926 
30 339 
1 245 478 

790 679.804 
8 529 094.806 
2 686 870.535 
299 775.255 
12 306 420 400 

Annual performance NAV per unit 
10 000.00000 € 
01.01.2021 
9 880.88028 € 
31.12.2021 
-1.191% 
since 1.1.21: 

3.4.  Financial performance 

The  first  year  of  CPF  operation  coincided  with  an  exceptionally  challenging  market 
environment  for  fixed  income  investment,  impacting  negatively  the  valuation  of  the 
fund’s  securities.  The  CPF  ended  the  year  with  an  economic  result  of  EUR -133.3 
million. 

This  result needs  to  be  viewed in  the  context  of very difficult investment  conditions  in 
international  bond  markets.  The  year  2021  was  the  worst  year  for  bond  markets  since 
1999  with  global  bond  market  indices  declining  by  4.7%  and  euro-denominated  bond 
market  indices  declined  by  2.85%3.  This  outcome  was  driven  by  higher  inflation 
prompting  market  expectations  of  tightening  of  monetary  policy  by  central  banks. 
Consequently, the CPF return was also negatively impacted, although remaining in line 
with its benchmark and significantly out-performing the broader bond market evolution. 

Nonetheless, the main driver for the 2021 result was by far the loss from the change in 
fair  value  of  securities  and  interests  on  securities  (EUR -122.9  million)  which  was 
reduced  by  EUR 40.5  million  from  net  currency  gains  from  holding  USD-denominated 
assets  to  a  net  loss  on  securities  of  EUR 82.4  million.  EUR 45.5  million  losses  
(EUR -37.2 million from forwards and EUR -8.3 from cash) were related to hedging the 
currency risk of USD-denominated securities and are largely offset by currency and other 
gains from holding USD-denominated assets included in the security result above. 

3  The Barclays Global Aggregate Bond Index, a broad benchmark representing USD 68 trillion worth of 
sovereign  and  corporate  investment  grade  (IG) debt denominated  in  various  currencies,  lost  4.7%  in 
2021.  The  Bloomberg  Euro-Aggregate,  a  EUR 13.4  trillion  broad  benchmark  of  euro  denominated 
Investment Grade debt posted a record loss of 2.85% in 2021. 

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3.5.  Statement of financial performance4 

Revenue from operating activities 
Foreign exchange gains 
Other revenue from operating activities 

Expenses from operating activities 
Foreign exchange losses 

Other expenses from operating activities 
     Audit fees 

RESULT FROM OPERATING ACTIVITIES 

Financial revenue  
Interest revenue on: 
     Cash and cash equivalents 
Other interest revenue 

Other financial income - fair value changes of securities 
Other financial income - fair value changes of derivatives 

Security lending income 

Financial expenses  
Interest expenses on cash and cash equivalents 

Other financial expenses - fair value changes of securities 
Other financial expenses - fair value changes of derivatives 

Custody fees and other financial expenses 

FINANCIAL RESULT 

ECONOMIC RESULT OF THE YEAR 

2021 
EUR 

3 377 874 
3 377 874 
- 

(11 695 279) 
(11 678 279) 

(17 000) 
(17 000) 

(8 317 405) 

882 260 
2 306 
2 306 
- 

- 
- 

879 954 

(125 880 612) 
(4 563 034) 

(82 370 766) 
(37 204 835) 

(1 741 977) 

(124 998 352) 

(133 315 757) 

The negative return of the CPF portfolio in 2021 must also be analysed in the light of the 
performance  of  legacy  portfolios  over  the  last  years.  The  chart  below  illustrates  the 
performance of EFSI and EFSD since the inception of the funds. 

4 

Since this is the first year of CPF operation only 2021 accounts are available. In the next annual report 
the  balance  sheet  will  include  results  both  for  the  current  year  and  the  previous  year  to  allow  for 
comparison. All amounts are in EUR. 

Page 6 / 11 

 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                      
Returns  in  2019  and  2020  were  largely  driven  by  positive  curve  returns,  as  the  yields 
were  pushed  to  historical  lows  by  health-related  concerns  and  accommodative  actions 
from central banks. The negative curve returns in 2021 have partially offset the positive 
performance of 2019 and 2020. 

4.  FORWARD LOOKING DIVERSIFICATION 

4.1.  Introduction 

This section presents the results of the in-depth assessment of the risk-return impact of possible 
CPF asset class diversification carried out by the Commission services since summer 2021. 

The  outlook  for  returns  of  fixed  income  portfolios  remains  challenging,  possibly  for  several 
years.  While  a  necessary  element  of  the  response  to  the  pandemic,  prolonged  central  bank 
support  over  recent  years  has  boosted  bond  prices  to  very  high  levels  and,  mechanically, 
compressed expected returns going forward. As developed market economies continue to recover 
from the pandemic, central banks have signalled that they will gradually tighten their monetary 
policies,  especially  as  inflation  concerns  have  recently  intensified.  According  to  the  European 
Commission’s latest European Economic Forecast, published in February 2022, inflation in the 
EU will increase from 2.9% in 2021 to 3.9% in 2022 before receding thereafter. This relatively 
sharp  reversal  in  the  interest  rate  cycle  creates  the  conditions  for  important  valuation  losses  in 
investment grade fixed income portfolios like CPF. 

To  avoid  situations  in  the  future  where  CPF  performance  is  exclusively  dependent  on  a  single 
asset class, the Commission services have assessed the implications of expanding the investment 
universe to include some exposure to equity or other asset classes. Following extensive analysis 
and  quantitative  simulations,  it  was  concluded  that  the  risk/return  profile  of  portfolios  might 
benefit, over the longer term, from an allocation to equities of up to 20% of the portfolio. The 
expansion of the CPF investment policy to include exposure to equity is allowed under Article 
8(1)  of)  the  CPF  Asset  Management  Guidelines5  which  allow  the  CPF  to  invest  in  ‘regulated 
collective  investment  vehicles investing  in  [debt]  and  equity’.  These investments  shall take  the 
form  of  ‘collective  investment  undertakings  covered  by  Directive  2009/65/EC  (UCITS)6 

5  Commission Decision of 25.3.2020 on the Asset Management Guidelines of the common provisioning 

fund (C(2020) 1896 final, OJ C 131, 22.4.2020, p. 3–11. 

6  Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council  of  13  July  2009  on  the 
coordination of laws, regulations and administrative provisions relating to undertakings for collective 
investment in transferable securities (UCITS) (recast) (OJ L 302, 17.11.2009, p. 32). 

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including exchange-traded funds which invest in equity [or in debt instruments] where maximum 
losses  cannot  exceed  amounts  invested’.  The  remaining  part  of  this  staff  working  document 
presents the analytical work that supports this conclusion. 

4.2.  Methodology 

The review was based on three strands: 

(1)  review of relevant literature from academics and practitioners focusing on the characteristics 

of various asset classes, notably equities, and their interactions in a portfolio context; 

(2)  CPF portfolio optimization simulations and assessment of risk tolerance; 
(3)  examination of the target allocations of similar investors. 

4.3.  Literature review 

This  review  examined  various  asset  classes  such  as  equities,  high-yield  bonds  (non-investment 
grade) and commodities such as gold. In combination with the other strands of this review, the 
literature review concludes that equities is the most promising starting point for diversification.  

The  attractiveness  of  asset  classes  should  not  be  assessed  only  individually,  but  mainly  in  a 
portfolio  context,  where  the  interaction  between  the  returns  of  various  asset  classes  (return 
correlations) comes into play. Lower correlation increases diversification and thus risk-adjusted 
returns. Correlations are not stable and one can identify regimes of higher and lower correlations 
across  time.  Yearly  correlations  are  mainly  driven  by  monetary  policy  and  economic  policy 
uncertainty. In particular, the behaviour of inflation seems to be an important driver of changes in 
correlations.  

Overall, however, government and corporate bond returns correlate more between them than with 
those of equities. This suggests that adding equities to a bond portfolio can materially  enhance 
diversification.  Research  on  the  real  returns  of  equities  since  the  1960s  shows  that  equities 
performed  well  during  periods  of  economic  expansions,  while  their  returns  suffered  during 
recessions. On the other hand, bonds had a positive return during recessions, but underperformed 
equities when the economy was doing well. Consequently, the inclusion of a limited percentage 
of  stocks  to  a  bond  portfolio,  historically,  increases  the  portfolio’s  long-term  expected  returns, 
while also remaining relatively resilient during market stress periods. 

4.4.  Risk and return of a diversified stock and bonds portfolio 

In order to assess the desirability of adding equity exposure to the CPF, the Commission services 
evaluated  what  the  market  offered in terms  of combinations  of  risk  and  return. This required a 
look at expected returns (ER) and risks, not only at asset class, but also at portfolio level, where 
interactions (correlations) between the performance of asset classes is a key factor.  

The analysis was focused on so-called ‘tail risk’ measures, aiming to capture low probability but 
high  loss  scenarios.  The  metric  used  was  the  annual  Conditional  Value  at  Risk  (CVaR),  a 
measure  of  the  average  loss  that  would  be  experienced  in  the  case  of  a  tail  risk  scenario.  The 
confidence level used was 95%, implying a one in twenty years frequency of occurrence of such 
a tail risk scenario. 

Analyses showed that expanding the investment universe can deliver better expected return per 
unit of risk, or lower risk for a given ER. In particular, the analyses showed that the higher the 
weight of additional asset classes (notably equities), the larger the probability of achieving better 

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returns.  However,  the  allocation  of  part  of  the  CPF  portfolio  to  equity  will  also  increase  the 
riskiness of the portfolio. Furthermore, while the efficiency rate (expected return per unit of risk 
or ER/CVaR ratio) is rising initially, it peaks around an allocation of 20% to equities and starts 
decreasing thereafter. 

Indicatively,  a  portfolio  composed  only  of  fixed  income  investments  could  offer  an  expected 
return of 0.7% per year, while the annual CVaR would be around 4.4%. When the proportion of 
other  asset  classes  rises,  in  this  case  equity,  to  20%,  the  expected  return  more  than  doubles  to 
1.6% per year. CVaR also increases to 6%, but this increase, is more modest (from 4.4% to 6%).  

Beyond a 20% allocation, the additional expected return per unit of risk starts decreasing. While 
the  exact  numbers  can  differ  to  some  extent,  the  overall  conclusion  on  the  range  of  optimal 
allocation was robust across different assumptions. 

These  expected  returns  should  be  achieved  on  average  over  the  course  of  the  longer-term 
strategic investment horizon. Therefore, they should not be expected in each and every year, as 
outcomes  will  depend  on  market  conditions  in  the  underlying  bond  and  equity  markets,  which 
remain subject to uncertainty and volatility7. 

As  seen  earlier,  the  allocation  of  a  part  of  the  CPF  portfolio  to  equity  will  also  increase  the 
riskiness  of  the portfolio  compared  to  a  solely  fixed income  portfolio.  However,  given  the low 
probabilities attached to such an outcome, and the offsetting increased average expected returns 
over the longer-run, the analysis carried out by the Commission services concludes that adding 
this exposure to equity enhances the overall expected risk-return performance of the fund. 

While this diversification plan entails potentially higher variations in the value of assets held in 
CPF, the 20% limit has been calibrated to preserve, with a high confidence level, the fund’s core 
function of ensuring any guarantee calls in full and in time. The analysis in the following section 
aimed at ensuring that even worst-case/tail-risk scenarios would not jeopardise the ability of the 
CPF to honour guarantee calls. 

4.5.  Risk tolerance and investment horizon 

Risk  tolerance  can  be defined  as  a composite  of  an  investor’s ability  and  willingness  to  accept 
risk.  Whereas  the  risk  ability  is  set  by  the  investment  objectives  of  a  portfolio,  the  risk 
willingness relates to the amount of short- or medium-term losses one is ready to accept in the 
anticipation of reaching longer-term objectives. Risk tolerance is most often quantified through 
Value-at-Risk (VaR) metrics. 

The objective for the CPF portfolio is to ensure capital preservation over the investment horizon, 
which under very stringent assumptions is currently estimated at around 9 years. Consequently, 
when  deciding  on  the  optimal  asset  allocation,  one  should  strive  to  select  a  portfolio  that 
maximises the probability of obtaining non-negative return over the next 9 years.  

With a portfolio holding a maximum of 20% equity, it has been estimated that a severe market 
turmoil  would  lead to  portfolio  losses  in the region  of  6% (as  measured  by  a  tail  risk  measure 
such as Conditional Value at Risk, CVaR), leaving a still sufficient 94% of the value in place. 
This is projected worst case scenario that should not occur more often than once per every twenty 
years. 

Considering  the  positive  net  cash-flow  profile  of  the  CPF  up  to  2030  and  the  total  size  of  the 
CPF, the addition of equities into the portfolio would also not put at risk the capacity of the CPF 

7  Expected returns are central estimates of probability distributions of returns, where actual results can 

turn out to be better or worse. 

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to  pay  for  the  guarantee  calls  on  the  liability  side.  On  the  contrary,  the  higher  expected  return 
across the investment horizon should enhance the value of the portfolio over the long term and 
increase the probability of reaching the capital preservation over the investment horizon. 

To summarize, the analysis of the risk tolerance and the undertaken combined asset and liability 
stress  tests,  have  indicated  that  even  worst-case/tail-risk  scenarios  would  not  jeopardise  the 
ability of the CPF to honour guarantee calls. 

4.6.  Target allocations of similar investors 

Many  other  types  of  conservative  investors,  such  as  pension,  endowment  or  sovereign  wealth 
funds  invest  in  equities.  Some  central  banks  of  developed  economies,  which  traditionally  have 
only  invested  in  fixed  income,  have  also  diversified  their  reserves  to  include  equity  exposure.  
A 2021 survey from the World Bank on the asset management practices of central banks reported 
a 9.5% median allocation to equities among the central banks that have introduced equities as an 
eligible asset class. Generally, central banks do not select individual equities, but invest in a very 
broad equity universe (e.g. via equity Exchange Traded Funds - ETFs). 

The analysis undertaken by the Commission services showed that the operations guaranteed by 
CPF  have  more  similarities  with  non-life  insurers (e.g.  Property  and  Casualty),  given  that  they 
also  face  uncertain  (in  time  and  size)  outflows  similar  to  the  guarantee  calls  on  the  CPF  from 
policies  such  as  the  InvestEU  or  the  external  lending  mandate  and  EFSD+.  Equity  exposure 
typically range around 20% of European non-life insurers’ investments. 

4.7.  Diversification plan 

Exposure to equity would be reached exclusively through investments in ETFs, which can offer 
exposure  to  broad  baskets  of  stocks,  across  companies,  sectors  and  geographical  regions.  The 
Asset  Management  Guidelines  of  the  CPF  already  allow  the  investment  into  equity  through 
regulated  collective  investments  including  ETFs.  This  diversification  strategy  could  potentially 
be  expanded  to  other  portfolios  managed  by  the  Commission  with  similar  investment  horizons 
and objectives. 

At the current juncture, inflation risks have risen while major central banks, including the ECB, 
have  signalled  that,  based  on  their  current  projections,  they  will  be  on  a  path  of  tightening 
monetary  policy,  thus  gradually  withdrawing  unprecedented  levels  of  liquidity.  Decreasing 
liquidity and rising inflation have led to downward pressure on the prices of assets like bonds and 
equities and possibly to an increase of the correlation of their returns for some time. Therefore, 
the build-up of equity exposure would be progressive, taking into account market conditions and 
valuation levels, possibly through the investment of new inflows to the CPF. 

5.  CONCLUSION 

In first year of operations CPF has faced many challenges, which have put downward pressure on 
its performance. CPF operated at a EUR 133 million loss in 2021, which was nonetheless in line 
with  its  benchmark  and  a  significant  outperformance  on  wider  bond  market  performance. 
Extensive qualitative and quantitative analysis showed that adding equity exposure of up to 20% 
of the portfolio would be beneficial in terms of expected risk-adjusted returns. While risk would 
increase  to  some  extent,  it  would  remain  consistent  with  the  risk  tolerance  of  the  CPF.  The 
increased  risk  of  higher  losses  every  20  years  would  be  more  than  offset  by  the  increase  of 
expected returns.  

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On this basis, the Commission will seek to finalise all preparations for investment in equity ETFs 
by  autumn  2022,  which  requires  the  completion  of  a  number  of  accounting,  technical  and 
operational  processes.  Investment  in  equity  ETFs  will  be  progressively  built-up,  taking  into 
account market conditions and valuation levels – possibly through the investment of new inflows 
to the CPF. 

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