Investment policy

1. Main directions of expenditures of the assets of the State Oil Fund of the Republic of Azerbaijan (hereinafter -SOFAZ)

1.1. Upper limit of transfers to 2025 the state budget of the Republic of Azerbaijan;

1.2. Financing of the “State Program on strengthening international competitiveness of the higher education system in the Republic of Azerbaijan for 2019-2023”;

1.3. Funding of the "State Program for the education of young people at prestigious higher education institutions of foreign countries for 2022-2026" approved by Order No. 3163 of the President of the Republic of Azerbaijan on February 28, 2022.

1.1 The objective of the Investment Policy of SOFAZ

1.1.1. In 2025 – SOFAZ will implement an investment policy aimed at maximizing returns while minimizing the probability of substantial losses

2.2. Investment Portfolio

2.2.1. Forecasted size of the investment portfolio of SOFAZ

2.2.1.1. The total projected value (weighted average size) of SOFAZ’s investment portfolio for 2025 is anticipated to be USD 58.1 billion.

2.2.2. The currency composition and allocation of the investment portfolio:

2.2.2.1. USD is the base currency of the investment portfolio. A minimum of 85% of the investment portfolio value shall be invested in assets denominated in USD, EUR, and GBP, subject to annual review by the Supervisory Board.

2.2.3. Sub-portfolios of the investment portfolio

2.2.3.1. Investment portfolio of SOFAZ consists of the following Sub-portfolios:

2.2.3.1.1. Fixed Income Sub-portfolio - up to 40% of the portfolio, with a maximum lower deviation of 10%.

2.2.3.1.2. Equity Sub-portfolio- up to 25% of the portfolio, with a maximum upper deviation of 3%.

2.2.3.1.3. Real Assets Sub-portfolio- up to 10% of the portfolio, with a maximum upper deviation of 3%.

2.2.3.1.4. Gold Sub-portfolio- up to 25% of the portfolio, with a maximum upper deviation of 4%.

2.2.3.2. Sub-Portfolio Composition

2.2.3.2.1. Fixed Income Sub-portfolio: Includes money market instruments, central bank deposits and debt obligations.

2.2.3.2.2. Equity Sub-portfolio: Includes public equities from internationally recognized market indices and private equity and debt funds as well as co-investments. The unlisted exposure should not exceed 7% of Investment Portfolio.

2.2.3.2.3. Real Assets Sub-portfolio: Includes direct investments, co-investments and fund investments in real estate and infrastructure, as well as real estate and infrastructure debt funds.

2.2.3.2.4. Gold Sub-portfolio: Includes gold bars meeting the requirements of the London Bullion Market Association.

2.2.4. Benchmark of the investment portfolio

2.2.4.1. Fixed Income Sub-portfolio: Benchmarked against relevant currency-specific ICE BofA Fixed Income Indices.

2.2.4.2. Equity Sub-portfolio: Benchmarked against MSCI Stock Market Indices.

2.2.4.3. Gold Sub-portfolio: No benchmark is applied, in accordance with the “Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan” (Rules) approved by Presidential Decree No. 511 dated June 19, 2001.

2.3. Risk management requirements of the investment portfolio

2.3.1. Interest rate risk

2.3.1.1. The weighted average duration of the Fixed Income Sub-portfolio is determined based on global market conditions, with deviations limited to six months from the respective benchmark duration.

2.3.2. Credit Risk

2.3.2.1. Excluding depositary banks and sovereign debt obligations of benchmark-listed countries, the maximum exposure to a single issue or issuer should not exceed 10% of the Investment portfolio.

2.3.2.2. Credit quality of debt instruments are subject to limitations outlined in the Rules.

2.3.2.2.1. Assets included in the SOFAZ’s investment portfolio as a result of investments made for implementation of projects in accordance with the acts of the President of the Republic of Azerbaijan are not subject to 5% upper limit on allocations to non-investment grade debt obligations and deposits, set in section 3.3 subsection 8 of the Rules

2.3.3. Liquidity requirement

2.3.3.1. Liquidity of the SOFAZ’s assets should be at a sufficient level to ensure full and timely execution of planned cash and other transfers related to budgetary expenditures of SOFAZ. To fulfil this at least USD 100 million (minimum liquidity level) must be held in highly liquid short-term money market instruments. The shortage in minimum liquidity level should not exceed more than 7 (seven) business days.

2.3.4. Requirements with respect to external managers

2.3.4.1. The external manager or its parent company must hold a credit rating at or above investment grade from a recognized international rating agency (Standard & Poor’s, Fitch, or Moody’s). Alternatively, the manager must have at least five years of successful asset management experience or expertise in managing assets valued at no less than USD 1 billion.

2.3.4.2. The total volume of funds allocated to external managers must not exceed 60% of the overall investment portfolio. The maximum amount allocated to any single external manager must not exceed 5% of investment portfolio.

2.3.4.3. The investment mandate and duration of engagement for external managers involved in the management of assets of SOFAZ must be specified in the agreements signed between the Fund and the respective managers.