I’ve got two fun reads for you this weekend…and one bear. I’ll start with the fun.
The first is RBC Dexia’s October edition of “Perspectives”. It’s an interesting read that…you guessed it…offers experts’ perspectives on a variety of topics related to finance and asset management. And this edition features such great minds as…Gordon Clark and Ashby Monk on the topic of SWFs (page 8). Now wait, before you skip it, it also has some actual experts, such as Josh Lerner (page 10).
The second is OMFIF’s October Bulletin. As usual, there’s plenty of absorbing stuff to ogle in these things, but I’d like to direct your attention in particular to the short article by Andrew Rozanov (page 11). He makes some really compelling observations about SWFs that I think are worth highlighting. Here’s a clip:
“The equivalent of the ‘Impossible Trinity’ in the SWF world may contain the three typical policy objectives of achieving stabilisation, promoting long-term saving and supporting economic development. A state-owned fund may be successful in pursuing two, but rarely, if ever, all three of the objectives.”
And now for the bear: Aaron Drew of the Guardians of the NZSF has a white paper entitled “Modelling of asset returns and the economy for the 2010 Reference Portfolio Review” (h/t David Chaplin). The paper is actually quite interesting (and much easier to read than I’m suggesting). Here’s an example of what you’ll learn if you sit down to read it:
“…the modelling framework used to generate portfolios, sensitivity analyses and performance metrics of interest for the NZSF‟s 2010 Reference Portfolio Review…” and “…the risk and return trade-offs facing the Guardians of New Zealand Superannuation in its core risk profile choice.”
Right?! What else would you want to do on your weekend than learn about this stuff? Good times ahead. Enjoy it!
The NZ paper: what happens if you assume a long term equity premium of only half their assumption? Current trends in the equity premium are not too encouraging, especially with a near term forecast of anemic world growth. And why on earth would a country like NZ issue gvt bonds, swap them into foreign currency and invest the proceeds in foreign bonds??? I am now even more inclined to question the economics of the NZSF (which now has to be funded from lt gvt borrowing (above the T-bill rate). And they do not specify the cost of hedging the NZD either..All in all this looks like a fund that does much more for its staff/consultants/bankers etc than for the citizens of Kiwiland, under a thick blanket of mathematics. The obvious policy for a small “open economy withlitthe economic diversification” is to minimize public sector liabilities, public “overhead” and replace income-based taxes as much as possible by consumption tax. As the current gvt is trying to do, apparently, whilst trying to figure out how to use the opportunity of having an economically redundant NZSF bequeathed to them by their more statist predecessors…The book about running small open economies was written by Singapore. Once you are in Spore’s shoes (no foreign or domestic debt, key infrastructure debt free and in local/state hands, you can start investing abroad if you are so rich that tax reductions become irrelevant and wealth distribution is politically challenging. And even then you do it for the benefit of national competitiveness (small countries have no incentive to support any world case, they can afford to be free riders so their governments owe it to the citizens/stakeholders to do so). Cheers!