Oxford SWF Project

Ashby Monk

Last week, Institutional Investor hosted one of their “Global Sovereign Funds Roundtables” in London.

As is typical with these large conferences, the attendees were given a hand-held device for quick response polling. This type of audience polling is actually pretty cool, as it allows for dynamic and interactive discussion.

And it generates data! Indeed, I just came across the ‘electronic audience polling results’ over on Institutional Investor’s Sovereign Funds Central. There are quite a few interesting nuggets of information in the data. However, I was most surprised to see the extent to which SWFs are moving (or planning to move) asset management in-house:

• In the wake of the crisis, 40% of the respondents said SWFs were reducing the number of their external managers (47% saw no noticeable change while only 13% saw an increase).
• 40% said they were already increasing the proportion of assets managed in-house (34% said they were staying the same while 26% said they were decreasing).
• 80% said they were seeking to grow their internal capacities so as to be able to manage more of their assets in-house in the future.

In short, there appears to be a widespread trend among SWFs to manage assets internally.

I’m a bit surprised by this. One would have thought that the recent crisis and ensuing volatility might have pushed SWFs to outsource more of their assets. At the very least, outsourcing would provide SWFs with some political cover domestically if returns went south again; i.e. the SWF could dump the under-performing manager and get a new one. If the SWF is the asset manager, the blame for poor returns will fall squarely on its shoulders.

This then raises the question as to why SWFs would want to take on the risk (politically and financially) of managing these assets themselves. The obvious answer is cost; good asset managers don’t come cheaply. So bringing the asset management in house may be cheaper.

Another potential explanation pops up in the conference data: the sponsoring government may be looking to exert more influence over the investment decisions. Indeed, 73% of the respondents noted that there was a definite government influence within the SWFs’ governance structure. In other words, government representatives were chairing or sitting on committees.

Perhaps these government representatives would like to have more influence over where the assets are placed. Put another way, this may be a way to facilitate more ‘strategic’ investing by placing the actual investment decision under the influence of government rather than just the asset allocation decision.

I acknowledge that this interpretation may be a bit of a stretch, but it’s a bit more intriguing (i.e. provocative) than the more obvious ‘cost saving’ interpretation. And given the medium (i.e. a blog post), I’m more interested in thinking about the intrigue than the obvious…