amount will vary according to the FRR s perfor- mance. Over the year, the surplus increased by EUR 1.17 billion, largely due to the performance assets, and at 31 December 2016 amounted to EUR 14.27 billion (after revaluation of the CNIEG balance), i.e. additional performance of 8.96% over 2016. This is an indicator of the FRR s ability to meet its liabilities commitments and create value for the State.

The portfolio s market risks

The overall portfolio s annualised volatility remains low by the FRR s past standards, whether measured ex ante (the portfolio s pro- jected volatility) or ex post (actual volatility).

The ex-post annual volatility of the value of the FRR s assets was 6.28% in 2016 (versus 6.85% in 2015) with an annual return of 4.97% (versus 3.08% in 2015). Ex-ante volatility was 6.5% at 31 December 2016, compared with 6.27% one year earlier.

The risk of an unfavourable change in the value of the portfolio (a loss) is assessed over a short- term horizon of one year; this is the time frame of the annual strategic asset allocation review in consultation with the FRR s governance

The average potential loss over a one-year hori- zon in 1% of the estimated worst-case scenar- ios, measured by a Conditional Value-at-Risk (CVaR) of 99% over one year, is 16.4% of the

FRR s assets (versus 14.3% at end 2015), i.e. EUR 5.92 billion. This increase can be explained by the higher weighting of risky assets in 2016, as well as a better assessment of financial risks to options following the reintroduction of MSCI s RiskManager application during 2016.

Risk on performance assets

Performance assets (mainly equities) present the most significant risk factor in CVaR. Their contribution to the average potential loss linked to changes in prices in 1% of the worst-case scenarios is 15.9% of the FRR s assets, i.e. EUR 5.73 billion (compared with 13.5% at the end of 2015).

Interest rate risk

At the end of the year, the average potential loss linked to yield curve changes, measured by a one-year CVaR of 99%, was 0.6% of the FRR s hedging assets, i.e. EUR 0.2 billion on the market value of the FRR s portfolio (compared with 0.8% at the end of 2015). This decrease in risk resulted from a reduction in the relative weight- ing of fixed income assets in the FRR s portfolio.

The FRR s portfolio s overall modified duration fell from 2.48 at the end of 2015 to 1.651 at the end of 2016. This means that for a uniform rise

1 Including fixed income assets in the performance component.

Contributions to the portfolio s modified duration by asset class and maturity









Performance portfolio Hedging portfolio

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Time to maturity (year)