2010 September « Oxford SWF Project

Archive for September, 2010

A New SWF For Bangladesh

Published September 21, 2010 Uncategorized 3 Comments
Tags: Atiur Rahman, Bangladesh, Ben Bernanke, Carolyn Cohn, Colombia, Conditionality, foreign exchange, Ghana, IMF, India, international monetary fund, Iran, Lebanon, Mauritius, Nigeria, Papua New Guinea, Reserves, Rwanda, Saudi Arabia, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs, Taiwan, Tunisia

Ashby Monk

Carolyn Cohn of Reuters reports that Bangladesh is in the planning phase for a new SWF. Apparently, it will be modeled on Singapore’s GIC and could be worth as much as half a billion dollars. The impetus for the new fund was the country’s rapidly growing forex reserves, which have doubled in the past 15 months to $11 billion.

The Reuters article also seems to suggest that this new SWF is linked to a new IMF credit facility that Bangladesh is negotiating, which would be a pretty interesting scoop if true (that said, the article is a bit sketchy on this point…so it’s hard to know exactly what’s going on).

For those keeping track, this is the 13th (!) new SWF that has been announced in 2010 alone (i.e. in the last 9 months). This includes Colombia, Ghana, India, Iran, Lebanon, Mauritius, Nigeria, Papua New Guinea, Rwanda, Saudi Arabia, Taiwan, and Tunisia (though some of these countries have since reconsidered). And, on top of that, we had Ben Bernanke telling a bunch of state governors that they should consider setting up SWFs of their own (of which five already have).

Anyway, let’s just say that the new Bangladeshi fund gives further support to those who see SWFs as an integral part of the ‘new normal’.

Why CalPERS Needs a “Management Geek”

Published September 20, 2010 Uncategorized 2 Comments
Tags: Bloomberg, Calpers, Joe Dear, Joseph Dear, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs, The Economist, Washington State Investment Board, WSIB

Ashby Monk

No, CalPERS isn’t technically an SWF, but I still like to discuss the fund in this forum when it seems relevant. After all, this behemoth operates within the confines of a large government bureaucracy, which means there are plenty of parallels that can be drawn from CalPERS back to the SWF community.

And, just like many SWFs, CalPERS has had a very tough few years, which highlighted some operational areas for which CalPERS was woefully deficient. As The Economist recently noted,

“Admittedly, CalPERS is not the only public pension fund in America nursing a nasty hangover. But its woes are striking because they stem from racy investment bets, poor risk management and a lax attitude towards potential conflicts of interest at an institution that was supposed to be a model of modern fund management.”

And so, again like many SWFs, CalPERS recently launched a re-evaluation of its internal governance practices (which is, I have to admit, pretty ironic). Enter Joe Dear: the man in charge of the clean-up.

Who is Joe Dear, you ask? Is he some financial sophisticate with unparalleled mental processing power that can literally derive option prices while running on a treadmill? No. Don’t get me wrong, when I interviewed Dear up in Olympia when he was the Executive Director for the Washington State Investment Board, he came off as extremely smart and savvy. But his value to CalPERS (and the WSIB) is not his financial knowledge; it’s his ability to manage the internal processes governing the investment operations of large investors.

I refer you to a nice Bloomberg article describing the man’s path to the world of high finance (the article reads a bit like a companion piece to the recent Institutional Investor article on Alaska’s Jeffrey Scott). It highlights the fact that Dear came up through the labor movement and local politics and only came to finance much later in life:

“In 1985, he made his name as an able negotiator when he became head of the Department of Labor and Industries, the state’s workplace safety watchdog….Four years later, Dear returned to Olympia to become chief of staff for Governor Gary Locke, a Democrat. In Locke, Dear found a fellow “management geek” obsessed with making government more efficient.”

I guess the reason I’m interested in Dear’s rapid rise to perhaps the top CIO job in the United States stems from the implicit recognition on the part of CalPERS that it needed to get the internal governance and management systems right. In fact, hiring Dear illustrates that governance was perhaps as important (or more so) than going out and getting all the investment talent money can buy. You think I’m reaching here? OK, hear it from the President of CalPERs’ Board:

“We didn’t need another investment professional; we needed a manager.”

So true. However, I’d say that in Joe Dear, CalPERS got both. And so, even though CalPERS has some pretty intractable problems to overcome, I’m cautiously optimistic for the behemoth’s future.

China’s SWFs Tournament: To the Victor Goes the Reserves

Published September 17, 2010 Uncategorized 3 Comments
Tags: China Investment Corporation, CIC, SAFE, Sovereign Wealth Fund, Sovereign Wealth Funds, State Administration of Foreign Exchange, SWF, CADF, China-Africa Development Fund, SWFs, Soap Opera, China Development Bank, CDB, Sarah Eaton, Zhang Ming

Ashby Monk

I had a little fun at the CIC’s expense last week when I wrote a (tongue in cheek) “SWF soap opera” that detailed some of the difficulties that this SWF has faced since its launch in 2007. I should mention, however, that the CIC actually came off looking quite good in my “story”. Instead, it was the fund’s masters that appeared to be playing games.

Well, it turns out that my “fictional interpretation” actually wasn’t all that far from the truth (…which was kinda the point, but anyway…): I just read a new paper entitled “A principal-agent analysis of China’s sovereign wealth system: Byzantine by design” by Sarah Eaton and Zhang Ming that indicates the CIC is in fact embroiled in some hard nose “bureaucratic politics” and that these “games” serve an important purpose. The authors also offer some insight into why the much talked about capital injection has not yet occurred.

The paper offers remarkable detail into the political turf wars that the CIC has been up against right from the beginning. And, even more interesting, the authors suggest that this is all part of a grand plan to force the CIC into an intra-state competition. Why? The State Council wants to ensure that the CIC is doing what it wants it to. Which means that the winner of the competition (i.e. the fund that demonstrates an ability to generate returns) will receive more (much more) reserves to manage.

The authors are calling this a “SWF tournament”, which includes China’s CIC, SAFE, NSSF and even potentially the CDB/CADF. Here are some excerpts from the paper:

“China’s leadership has since endorsed this rivalry because it has supplied the government with valuable carrot and stick mechanisms with which to discipline fund managers.”

“If CIC’s performance is found to be poorer than SAFE’s, and especially if CIC’s returns cannot match those of the conservatively-oriented NSSF, the management team of CIC will certainly receive heavy criticism from the upper reaches of government not to mention the media. Whether or not CIC will receive further capital injections will be decided by what CIC is able to achieve in the next couple of years.”

“The relative performance of these funds will also be key considerations in the central government’s decisions about the political futures of the official-managers at the helm of these SWFs. These are the two primary prizes in China’s SWF tournament.”

Well, that’s one way for the principals to discipline the agents! And it also calls into question the “independence” of this entity from the State Council (for those of you that bought into that rhetoric). Anyway, it’s a nice read for the weekend. Enjoy!

Ranking the World’s SWFs: Another Go

Published September 16, 2010 Uncategorized 2 Comments
Tags: assets under management, Institutional Investor, Loch Adamson, Ranking, Sovereign Wealth Fund, SWF, SWFs

Ashby Monk

It appears that Institutional Investor has thrown its hat in the “SWF Ranking” ring, joining the likes of Monitor, State Street, Pensions & Investments, International Financial Services London, RGE, SWF Institute among others. It’s a tough game, as the transparency (or lack thereof) of these funds necessitates: 1) quite a bit of sleuthing; 2) some large assumptions; and 3) a dash of guesswork.

Encouragingly, it looks as though II has gotten the right mix. Not surprisingly, the Abu Dhabi Investment Authority tops the assets under management ranking, weighing in at $627 billion. Up next is Norway’s SWF with $461.5 billion. And SAMA, CIC and Hong Kong’s Monetary Authority then round out the top five.

Now, I’m a bit surprised by some of the funds the II folks have decided to include. For example, most other rankings of this sort don’t include SAMA or the HKMA (even though they probably should due to their risk appetites). And I was particularly perplexed to see the Caisse de dépôt et placement du Québec in there, as this (to my knowledge at least) is really just a pooled fund for public pension plans in Quebec. So, while it is quite large and governmental, it also has liabilities to its “depositors”, which means it’s not a SWF. (See here for the ranking’s methodology.)

Anyway, the SWF report is still quite interesting to explore. I particularly enjoyed clicking through the pictures of the various people representing the top ten funds (although I am curious why ADIA is the only SWF in the top 10 without a face?).

And Loch Adamson’s article, entitled “Sovereign Wealth Funds Are Going Mainstream”, ties into the new ranking nicely, offering some insights into the changes and realizations that have taken place within many SWFs over the past few years:

“…sovereign wealth funds now face the problem that without clear governance guidelines defining how their funds can be deployed, their complex liabilities may be hard, if not impossible, to model and manage. That heightened vulnerability has made some investment teams more cautious.”

“In Norway the Finance Ministry demanded that Norges Bank Investment Management, the central bank arm that oversees Norway’s giant pension fund, submit to an external review of its active- management program. Other sovereign investors have kept internal debates about investment strategy private, but there is little doubt among asset managers who work closely with sovereign investors that such debates are raging widely.”

“Beyond the urgent need to address portfolio strategy, several sovereign wealth fund investors have faced political demands on their capital.”

“…some — like the Kuwait Investment Authority, Ireland’s National Pensions Reserve Fund and Russia’s two funds, the Reserve and National Wealth funds — have been raided by their own treasuries to bail out troubled banks and companies in their domestic economies.

“The greatest risk to sovereign wealth funds that I see is political risk, not the risk of broader macroeconomic uncertainty,” says Judith Posnikoff, a co- founder of Irvine, California–based fund-of-hedge-funds firm Pacific Alternative Asset Management Co., which works with a number of sovereign funds. “If the global economic recovery continues to slow, certain regions of the world may see a need to raid those funds.”

In brief, the biggest lessons coming out of this article are that:

SWFs need to improve (or have been working hard to improve) their internal governance practices in order to better manage assets in-house and, more specifically, better understand their risk profile (…which often means moving from an asset class approach to a factor based approach…); and
SWFs will need to develop protocols to ensure that internal staff have the freedom (especially from political haranguing) to invest to achieve financial (and not political) objectives.

Agree to agree.

West Still Afraid of SWFs? Sometimes

Published September 15, 2010 Uncategorized 6 Comments
Tags: Australia, Brenda Bouw, Canada, China Investment Corporation, CIC, GAPP, Jin Liqun, McKinsey Quarterly, Mubadala, Ottawa, POT, Potash, Qatar Investment Authority, Santiago Principles, Sovereign Wealth Fund, SWF, SWFs, Tony Clement, Waleed Al Mokarrab Al Muhairi

Ashby Monk

With news out that China may make a rival bid for PotashCorp (perhaps via Sinochem or CIC), Ottawa may finally be getting a bit nervous about China’s “commercial” interest in Canada’s natural resource wealth (…the FT’s Kevin Brown says China’s motivation is “entirely political“…) . According to an article in The Globe and Mail yesterday by Brenda Bouw:

“Ottawa will scrutinize any state-owned company bid for Potash…to ensure its motives are in line with a free-market economy and not government interests…”

Moreover, Industry Minister Tony Clement said Monday :

“We have specific rules about state-owned enterprises…to ensure that they are acting in a way that is consistent with a market-based economy, rather than as an agent for a foreign government’s interests…”

And so, the behavior of Canadian policymakers would seem to suggest that the West is still afraid of SWFs’ motives, which means that we haven’t come that far since 2008. Question: weren’t the Santiago Principles supposed to alleviate this type of concern and stop political and strategic investing by SWFs? After all, recall what GAPP 19 says:

“The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.”

And what does that mean? Well, it means that SWFs should avoid investments that put country ahead of portfolio. And, you ask, why do Western countries seem to care about this? In short, they’re afraid that ‘strategically oriented’ SWFs will become national security threats by secretly advancing geopolitical interests via investments in technologies or resources. (Quick note: China needs potash and lots of it.) Clearly, the Santiago Principles aren’t having the intended effect among certain Canadians (and one could also say the Chinese).

Now, while Canada frets about the strategic interests of China’s state actors, I came across a remarkably candid interview with an emerging market SWF executive that, in effect, explains his SWF’s strategic and political value to the sponsoring country. In light of the Western fears on display in Canada this week, I found this interview to be utterly astounding.

However, to make things interesting for you (…or at least for me…), I’m going to anonymize all the identifying information in the excerpts I’m reposting below (I’ll explain why later…just go with it). So, let your mind wander while reading these remarks; basically I’d like you to think about how you would react if you learned this Executive was at ADIA or CIC or the National Welfare Fund in Russia or any other SWF for that matter. But remember, the following are actual comments from a real executive of a real SWF. This is not a wind-up. Over to you, SWF Executive:

“If you look at the different priority areas where [this SWF] deploys its capital, you’ll see that there’s a very good fit between what’s articulated in [our national strategy] and what we do. We invest in highly innovative industries that play to [our country’s] strengths and competitive advantages…”

“This investment was a good fit: [this metal is an] energy-intensive business and relies on a multifaceted transport infrastructure, both of which we have. It also creates the type of employment we think will be quite beneficial for [our nation]. So in many ways, it meets our priorities. Now, there are many opportunities for deals we might make to support [our state owned enterprise operating in this business]. For example, we want to diversify and secure our upstream supplies. We don’t necessarily have a target in mind, but we will look for potential transactions.”

“…all our deployments of capital, even from a financial perspective, have had a strategic twist…We have many examples of investments that start out as financial investments but take on a strategic angle…” (emphasis added)

So, what do you think? Now, what if I told you that the above SWF Executive is in fact Jin Liqun of the China Investment Corpation? Concerned? Worried? Rustling around for the name of your local MP or Congressman? Well, relax, it’s not Jin Liqun.

It turns out, this is an interview with Mubadala’s Chief Operating Officer, Waleed Al Mokarrab Al Muhairi (kudos to McKinsey on this). And the reason I went to the trouble of anonymizing the discussion above was to illustrate the extent to which the West seems to treat SWFs differently; certain funds are given the freedom to invest ‘strategically’, such as Mubadala, while others are all but forbidden from investing this way (such as the CIC — even though it’s pretty clear it does anyway).

I’ve increasingly been thinking about why this is the case. Now, I don’t have any profound insights here, but I do have some initial thoughts. The foremost explanation has to be transparency of motive. Mubadala is a highly transparent entity that offers private sector levels of detail on its investment strategy and allocations. Let’s refer back to the interview:

“Because of our bondholders, we are committed to being very transparent about our financials, which we release twice a year. We have our pro forma midyears and then we have final statements we release at the end of every year. We’re committed to doing that and think that’s done wonders, from a transparency perspective, for Mubadala.”

And so, even though the fund has unabashedly strategic and political motives, it sets the target countries at ease. On the flip side, take the Qatar Investment Authority, which is also a highly strategic investor. It scores poorly (relative to Mubadala) on transparency, and, as a result, it has been taking quite a bit of flack in Australia for investments in farmland to ensure food security for Qatar. (Though, to be fair, most of its high profile investments in the UK, and even the acquisition of UK icon Harrods, haven’t raised too much concern.)

Next, a big part of Mubadala’s ‘freedom to operate’ stems from its ongoing (and credible) focus on a “double bottom line”. Put another way, it acknowledges its focus on both strategic and financial returns (most other SWFs do not):

“…we always use financial returns as the first filter when making an investment. If it passes the financial test, we look at the strategic metrics and see if, together, the financial and strategic metrics create a cluster or businesses that make sense from an Abu Dhabi perspective.”

Finally, I feel obliged to mention that the West probably pays less attention to Mubadala’s strategic ambitions because its sponsor, Abu Dhabi, is…well…to be blunt, it isn’t China. And that seems to matter a lot these days. In my fieldwork, I’ve come across quite a bit of Sinophobia in policy circles (some off the record and some not).

Anyway, if you read the paper I posted to the website yesterday (which you almost definitely did not…but if you did), you’d know that Gordon and I have a sneaking suspicion that most SWFs will eventually revert back to strategic investing. What will (can) the west do about that? If you want to know more, read the paper.

New Research: Form and Function in the 21st Century

Published September 14, 2010 Uncategorized 1 Comment
Tags: Ashby H B Monk, Gordon L Clark, research, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs, Weekend Reading

Ashby Monk

Gordon and I just finished a new paper that will be presented at a conference in New York early next month. In the paper, we attempt to situate SWFs within the new realities of global finance, focusing, in part, on their inherited form (i.e. western institutional investor) and how these funds may evolve over time to meet an increasingly strategic function. The paper is available at SSRN. As always, comments and criticism are welcomed.

Nigeria Edging Ever Closer

Published September 13, 2010 Uncategorized Leave a Comment
Tags: ECA, Excess Crude Account, Finance Minister Olusegun Aganga, IMF, international monetary fund, Nigeria, President, President Goodluck Jonathan, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs

Ashby Monk

Back in April, we learned the exciting news that Nigeria was actively looking into establishing a new and legal SWF that would replace the the much-maligned Excess Crude Account, which, despite it’s initial IMF backing, has been the source of considerable mismanagement and waste since its launch in 2003. Subsequently, in July, the plan for the new fund stalled, as the Governors (who enjoyed the benefits of the ECA) struck back; thereby illustrating the truism that slush funds tend to be popular among those with access to the slush. Nonetheless, the Governors were later convinced of the need to adopt a proper commitment mechanism at the national level for managing resource rents. And, while I initially complained that the “fast tracked” SWF was moving too slowly, it seems the wheels have in fact been in motion (which is probably due to the looming elections in January).

Indeed, in August we found out that the Nigerian SWF had received an earmark of $1 billion (which isn’t much, but it’s something). And today we learn that President Goodluck Jonathan has officially sent a bill to Parliament to create the fund:

“I have forwarded a bill to the National Assembly to create a national sovereign fund to ensure that we have the legal underpinning for national savings…The federal government, in concert with state governments, has already set aside the sum of $1 billion as seed money for the national sovereign wealth fund…”

So, I need to give credit where credit is due; if the National Assembly does what they’re supposed to, then Nigeria will have taken a big step in overcoming the resource curse. Nicely done.

That said, I feel obliged to offer a friendly warning: The simple act of setting up an SWF is not enough on its own to thwart corruption and mismanagement; the fund also has to have the necessary design and governance mechanisms to ensure that it succeeds where the ECA failed. And, in my view, getting this right is the hardest bit, as it requires integrating the fund into the budgeting process while also immunizing it from political interference. It’s tough to do in western democracies, so I’m pretty sure Nigeria will find this challenging.

So, that’s the next big thing we need to be watching for in Nigeria: how the fund is set up. And with technocrats like ex-Goldman Sachser Aganga in charge of much of this effort, I am cautiously optimistic…

After Icelandic Bond Short, SWF Goes Long PIGs

Published September 10, 2010 Uncategorized 1 Comment
Tags: Felix Salmon, GPF-G, Greece, Ireland, NBIM, Norway, Portfugal, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs

Ashby Monk

One of the big news stories out this week was the Norwegian SWF’s apparent appetite for the debt of the troubled peripheral economies of the Eurozone (Greece, Portugal, and Ireland), which came as a welcome shot in the arm for the entire Eurozone bond market (though this news actually isn’t new…it’s from mid-August). Still, it’s been hard for some to get a sense for why the GPF-G is keen to hold this debt. And, as Felix Salmon points out, there are some pretty wacky explanations out there.

As for me, I cut to the most straightforward explanation: the GPF-G (NBIM) is perhaps the most widely diversified institutional investor in the world, which means it pretty much owns a small piece of almost everything (it is estimated to own 1% of the global stock market). So, why not throw a bit of sovereign debt from these countries into the mix?

Nonetheless, I do acknowledge the potential for a bit of ‘political intrigue’ here. In reading through the pronouncements of the various interested parties, I’m reminded of when various ME and Asian SWFs spoke out about their intention to stay with the euro, which, in turn, helped to stabilize the currency. In that instance, there was a nagging sense that the pronouncements were a bit self-serving (i.e. they stemmed losses on their Euro portfolio). And, in this instance, Felix Salmon sees something similar:

“I’m also worried about the fact that the Norwegian finance minister is out there talking up his sovereign wealth fund’s book: it introduces an utterly gratuitous level of politicization to a process which should be much more disinterested. If the fund’s managers think that they can outperform their index by loading up on Greek debt, that’s fine. But let’s not turn their trading position into some kind of noble stance: it isn’t, and it shouldn’t be, either.”

True. And another thing to remember is that the Norwegian SWF got into some very hot water when it shorted Icelandic bonds a few years back. To sum up, the trading position of the SWF created a diplomatic incident. Perhaps the SWF has learned its lesson too well?

Best Practice Investment: An Alaskan Exemplar

Published September 9, 2010 Uncategorized 2 Comments
Tags: Alaska Permanent Fund, Chief Investment Officer, Frances Denmark, Institutional Investor, Jeffrey Scott, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs

Ashby Monk

I have to say, Frances Denmark’s profile of the Alaska Permanent Fund and its Chief Investment Officer Jeffrey Scott in this month’s edition of Institutional Investor is quite remarkable.

Weighing in at close to 6,000 words, Denmark offers more detail than you might want (such as the length of Scott’s bus ride to school when he was a kid in Idaho…52 miles). But (!) the article is still fascinating, as it goes in-depth and behind the scenes to show the process of reorganization and redesign that has taken place within this large public fund.

Over the past few years, the APF has undertaken some pretty innovative changes (some of which I’ve covered here, here, and here), but even I hadn’t grasped the extent to which Scott had changed things (and will continue to change things in the future). Here’s Denmark:

“Scott arrived in Alaska’s state capital in 2008, in the midst of the biggest economic downturn in 70 years, with a fierce determination to apply the latest and best thinking on investment management to the Permanent Fund. That would mean changing the way the fund’s assets had been allocated, invested and monitored for nearly three decades. Scott would have to create an industrial-strength risk management tool and redesign staff assignments. Most challenging of all, he would have to convince fund and state officials that this new path would lead the APF to a more secure future.”

What’s really interesting (and actually confirms my own experience working with public funds in the US) is that this process of “change” is anything but easy. Truth be told, these entities seem to crave the status quo, as entrenched stakeholders often have quite a bit to lose. Anyway, as Scott himself says in the article:

“You’re not going to go from Pension Fund 101 to Bridgewater in one fell swoop”.

No you’re not, and so Scott needed to be much more than a traditional CIO.

“He is a change agent who is sowing the seeds of a new investment management model far from the world’s financial capitals.”

What I also found particularly interesting (and gratifying) was the importance Scott placed on educating all of the stakeholders about the benefits of adopting his ‘best practices’:

“The board education process has been crucial.”

Agree to agree. And, as you might expect, Scott has been quite successful in his bid to revamp the APF (…which is why there are 6,000 words about him in Institutional Investor…); but, hold your horses, he isn’t finished yet:

“He also hopes to tackle the fund’s cost structure, a key area of inefficiency. “We spend a ton of money on gatekeepers,” he says. Possibilities include co-investment, strategic partnerships and consolidating to a few high-conviction managers, with resulting cost breaks for the fund. Limited resources remain a challenge. “That’s a difficult political situation,” Scott says. “The budget is set by the legislature. Compensation for professional asset managers with proven skill is higher than government scale.”

Anyway, it’s quite an interesting story, one worth reading in its entirety.

The SWF Soap Opera: Inspired by Actual Events

Published September 9, 2010 Uncategorized 6 Comments
Tags: "Fiction", Ashby Monk, China Investment Corporation, CIC, Soap Opera, Sovereign Wealth Fund, Sovereign Wealth Funds, SWF, SWFs

Ashby Monk

INT: ASHBY MONK’S OFFICE AT OXFORD UNIVERSITY

Cut to a bespectacled Ashby Monk nestled between towering stacks of books at a remarkably uncluttered desk. He is sipping a cuppa, eating a biscuit, and flipping through a stack of articles detailing (in chronological order – oldest first) news from the past few years about a certain Chinese SWF…

INT: ASHBY

(Thinking to himself)

Gosh. This is remarkable. The CIC has only been in existence for a couple of years, and it looks like it will already be getting $200 billion in new capital! Wow, good for them. Well done.