Steve Frank, Chairman of the Alaska Permanent Fund Corp. board, outlined the APF’s new investment strategy on Sunday. The article is an attempt to stave off further criticism among APF stakeholders, as some had voiced their confusion about the sudden change in policy.
One item that I found interesting was the decision to set up three “mini funds” of $500 million each to invest in stocks, bonds and real estate with a ‘real return mandate.’
“These “mini-funds” will allow the Permanent Fund board to see the approach that external managers take to asset allocation, and how it differs from the board’s standard approach. The board will compare the results of these portfolios with each other and against the fund as a whole, which may lead to adjustments and improvements in how we allocate all our assets.”
I interpret this to mean that the APF has set up a series of internal funds to generate additional competition and knowledge transfer. This will then allow the APF to refine its new strategies over time. It’s an interesting strategy, which seems to suggest that APF will be bringing more of the asset management in house. Perhaps the APF sees the CPPIB as a role model.
New SWF research papers are still popping up.
First, Laura Badian and Gregory Harrington just published a paper called “The Evolving Politics of Sovereign Wealth Funds.” The paper evaluates the various regulatory challenges that SWFs present. (h/t LinexLegal)
Second, Bertrand Blancheton et Yves Jégourel just published a paper (in French) entitled, “Les fonds souverains : un nouveau mode de régulation du capitalisme financier?” It’s an interesting article that evaluates the extent to which we should view SWFs as stabalizing forces in the markets. Their conclusion is not all that surprising, these funds have a beneficial influence on markets but they also engage in opportunistic trading. Basically it fits with the view that these funds are commercial entities and not motivated by extra-financial criteria.
Pat Forgey of the Juneau Empire has a great story today on the Alaska Permanent Fund’s decision to change its asset allocation policy.
The new policy groups assets based on risk characteristics rather than by the type of investment. It is an approach that other large, long-term investors use. Because there are situations where corporate bonds behave like stocks, it is inappropriate to slap the “bond” label on these investments. This new policy will allow for a more nuanced understanding of the risks being taken by the fund, which in turn will ensure that the Fund is operating within its risk budget. If I had to guess, I would say that the Fund was overexposed to certain risky assets before the crash, and the new policy is designed to ensure this doesn’t happen in the future.
While the new asset allocation strategy is itself of interest, I was also intrigued by the internal (and indeed external) debate that this change is generating. Apparently, politicians and even some Trustees were unsure about the change:
“It may be fine, it may be legit, but we were totally caught off guard and nobody knows anything about it,” said Sen Kevin Meyer.
Given that the Trustees have oversight responsibilities for the Fund, it is surprising to see two of them expressing their concerns so publicly. From a governance perspective, this is significant; typically asset allocation within a large trust-based fund is the responsibility of the Trustees (the managers just implement the asset allocation policy and make the actual investment decisions). The remarks made by the Trustees in Forgey’s article seem to suggest that this is not the case, though more details are obviously needed.
So it will be interesting to see how this all turns out. Fund Executive Director Mike Burns will appear before the Legislative Budget and Audit Committee in August to explain the new system.
Alex Dunnin flagged up an interesting Future Fund governance story in the Financial Standard. He suggests that the rumor that former treasurer Peter Costello would be offered a position working for the Labor Government at the helm of the $60 billion Future Fund illustrates a deep misunderstanding of the Future Fund itself. Dunnin notes:
“For example, the board already has a chairman in former CommBank chief executive David Murray and six guardians. Any role for Costello would have only been to join the board as an additional guardian or to replace one of the incumbents, noting that guardian John Paterson whose term expires this year is yet to be formally renewed.”
In short, Dunnin views the Costello appointment rumor as evidence that Australian politicians are unfamiliar with the Future Fund’s governance. This seems a bit of a stretch, but, given the Fund’s youth, it is possible that the politicians who were pushing for Costello to take over the Future Fund were forced to familiarize themselves with the Fund’s appointment procedures; the very procedures that were set up to keep politicians like them from meddling in the Fund’s internal activities.
The Korea Investment Corporation’s prospects are looking up, as it will be receiving roughly $5 billion dollars in additional capital in the coming months:
- $3 billion will come from the SK government so as to enable the KIC to resume its overseas investing.
- The Ministry of Finance will be allocating another $2 billion later this year in a bid to improve returns on reserves.
- This will take the assets under management up to around $30 billion.
The KIC is apparently out of the penalty box. After its $2 billion investment in Merrill Lynch went sour, it basically decided to withdraw and regroup. This new injection of cash is a sign that they are ready (and the government trusts them) to start investing again. Indeed, $1 billion of the new capital is reported to be heading into high-risk assets:
“(KIC) is studying a variety of investment options, including leveraged buyouts, distressed assets purchases and venture capital…”
Xie Ping of Central Huijin Investment Ltd and Chen Chao of the CIC have just posted a new research paper to SSRN. The paper, entitled “Sovereign Wealth Funds, Macroeconomic Policy Alignment and Financial Stability,” is the first I have seen from CIC’s staff. So I was pretty excited to get an inside view of this important SWF.
But don’t get your hopes too high. The authors don’t disclose much about the CIC that we don’t already know. In fact, rather than using their own experiences working within the CIC to develop their arguments, they instead use a case study of Norway’s Government Pension Fund-Global.
Nonetheless, the paper does offer some interesting insights into the thinking behind the CIC if not insights about CIC itself. It is thus worth a read.
Abstract: This paper firstly discusses alignment of SWFs with macroeconomic policy. We believe that SWFs can become an effective tool for fiscal policy; SWF investments should be made in alignment with the monetary authority, and help stabilize the exchange rate. SWFs also contribute to stability of the national balance sheet. Asset allocation of SWFs has significant impacts on the current and capital accounts of both domestic and international balance sheets. Secondly, this paper explores the impacts of SWFs on the global financial market and its stability, including those on asset bubbles, equity risk premium and financial market stability. We argue that the potential negative impact of SWFs on the global financial market is very limited, and that they are important stabilizing forces in the global financial market. We believe that SWFs contribute to the coordination of macroeconomic policy from a domestic point of view and to the stability of global financial market from an international point of view.
The CIC has really come to life in the past few weeks. I found five different stories on the fund today alone. Here is the round-up of the SWF’s activities today:
- The Goodman deal continues to attract attention, as does CIC’s growing interest in property.
- According to Gerson Lehrman (h/t Opalesque), China will target ‘greentech’ in its overseas investments: “By investing in companies with established track records in green power, China hopes to learn from others’ experience and technologies to boost its domestic greentech industry.”
- According to Bloomberg, the CIC will increase its exposure to Hedge Funds: “We’re looking for the best managers and a handful of fund of funds, and when I say handful I mean five or less.”
- The WSJ reports today that the CIC is set to launch a new round of global hiring: “…its 13 departments are seeking new talent in 33 categories, including risk management, asset allocation research, commodities investment, and private-equity investment.”
- Also according to the WSJ, CIC has taken over the supervision of China Reinsurance’s management team from the insurance regulator.
The CIC is clearly operating with renewed vigor. Having managed to avoid the large losses that plagued other SWFs in 2008, the fund likely sees a significant opportunity for returns in the short- to medium term.
Je suis tombé sur un blog intéressant. Si vous parlez français, j’imagine qu’il vous intéressera. En effet, c’est un site qui ne fait que les infos, les recherches et les vidéos sur les fonds souverain. Passez donc le voir.
If you don’t speak French, the above link to the SWF blog by Evrard de Malherbe won’t be of interest. Nonetheless, it is interesting to note the extent to which the French media and politicians have been covering the issue. There are several long ‘reportages.’