Temasek Holdings’ new 2011 annual report has some solid graphics that highlight the Singaporean fund’s strong track record of returns…
…and also highlights the fund’s overwhelming emerging markets focus.
The Design and Governance of Sovereign Wealth Funds
With the Temasek Annual Review for the 2010-11 due out soon, I thought it would be interesting to use our database of direct, publicly reported investments by SWFs, finalised up to December 2010 and our preliminary data for 2011 to give a preview of what we should expect to see. The data, presented in the charts below, shows three distinct trends.
So what does this tell us? I would have suggested before today that Temasek was rather overweight in Chinese banks, but with its sale of a substantial divestment of its shares in China Construction Bank and Bank of China suggests that this imbalance is being rectified. Nevertheless, with such a strong play towards China, Temasek needs to be careful that inflation doesn’t wipe out the gains that it seeks to make in this market. Finally, as it sells out of its domestic holdings, it sees the future in emerging markets, and that the West is yesterday’s news. We’ve known that Temasek has held this opinion for some time, but one hopes that it has robust risk management strategies in place to ensure that this doesn’t backfire in the short to medium term as historically, emerging markets are relatively volatile.
“One could say we are investing for infinity.”
I think we’d all agree, that’s a long investment time horizon! Now, Johnsen made this comment back in September while trying to justify why the Norwegian fund was investing in debt from Greece Spain, Italy and Portugal (which wasn’t going over all too well). So, it was probably more political rhetoric than anything concrete.
Still, what are the implications for investment strategy of an “infinite” time horizon? It’s a wonderful thought experiment, in my opinion. So let’s run with it for a second.
I’d say that nearly all of the intellectual horse power of asset managers operating in financial markets today is focused on generating returns in the short to medium term (say 24 months out). If you’re investing with a view to generating returns in 24 years or even 24 decades, how would that affect your investment strategy? Such a time horizon, which is backed up by enormous scale, affords SWFs unparalleled ability to hold risky assets.
So, in my view, it should affect their investment strategies. If SWFs (and their masters) really believe the “investing for infinity” comment, then they need to be putting much more money into long-term asset classes — such as unlisted infrastructure assets, private equity and real estate — where private investors can’t hang over the long term.
The real question then is whether SWFs are doing that; are they taking advantage of their “infinite” time horizon? Some are and some aren’t. Let’s start with Norway, which inspired this discussion. As it turns out, when FM Johnsen made his comment about “infinity”, the Norwegian fund didn’t have a direct infrastructure investment program and was only starting to develop a real estate portfolio. In other words, the “investing for infinity” was a nice soundbite to explain away investments in Greek debt, but it wasn’t an “investment belief” that was driving behavior within the fund. (Granted, that may be in the process of changing thanks to Elroy Dimson.)
Now, let’s look at AIMCo, the Albertan SWF, which is pushing hard into unlisted infrastructure assets and really setting the standards in terms of direct infrastructure investing. In other words, it is moving into an asset class that suits its profile, taking advantage of its inherent characteristics. To me, that’s how a fund with an infinite time horizon should be operating. So, well done, Alberta!
If you’re Temasek Holding, the answer to the above question is apparently three:
“Hsieh Fu Hua, Simon Israel and Greg Curl will work in close partnership with Temasek CEO Ho Ching to support the Temasek senior leadership team to build a sustainable institution that creates and delivers long term shareholder value.”
All three Presidents will be at work by September 1, which will take some of the workload off of Ho Ching. Recall that Ho was looking to step down from her position of CEO almost a year ago when the Goodyear fiasco forced her to stay on. So, I’m guessing this new troika of Presidents is as much a “try out” for potential successors as anything else. So, who’s it going to be? Which one of these Presidents will become Temasek’s next CEO? There can be only one…
‘Bottom feeding’ might not jump out at you as a lucrative endeavor. But in the game of finance, it most certainly is – there are opportunities aplenty to profit from others’ mistakes, misfortunes and miscalculations. Take as an example the LBO industry in the ’80s and ’90s, which was basically founded on the principle that struggling firms could be reorganized (and dismantled) to create new efficiencies (and profits). Anyway, opportunistic plays in distressed assets can be quite compelling, especially for investors that can take a longer-term approach to the turnaround. And, in my opinion, this is why SWFs are well positioned to tap into this segment of the market.
Granted, this isn’t really ‘news’. I’ve been talking about the potential boon to SWFs from distressed assets for some time. Indeed, back in February, I blogged about a $10 million investment by Temasek in a firm called SecondMarket, which is a market maker and broker for these types of illiquid assets. Basically, this small firm exists to facilitate the trade of LP interests, CDOs, MBS, and even private corporate stock among other things. I think there’s a bright future there, but some SWFs are also pursuing distressed assets directly from the distressed. For example, there was the widely reported offer the CIC made for a portfolio of assets at Stanford University back in late 2009. And, quite recently, the Chinese SWF apparently made a bid for Harvard University’s real estate portfolio:
“China Investment Corp., or CIC, recently approached the University’s money managers about a possible purchase of Harvard’s positions in six real estate funds.”
The folks over at Z-Ben (who passed along their latest research report on the CIC) have a nice way of characterizing the Harvard bid by the CIC:
“…we think of it as an instructive example of one of CIC’s favored investment approaches: large-scale bottom-feeding…One of the few advantages of CIC’s size and liquidity is its unequalled ability to write a check on the spot. That advantage can sometimes best be exploited when facing a motivated seller, for whom the fast disposal of an illiquid asset may mean the difference between survival and bankruptcy.”
Obviously, I agree. And what’s interesting about the Z-Ben report is their prediction for the future:
“There likely aren’t many distressed sellers in the world with USD2bn+ portfolios out to bids. However, we won’t be surprised if CIC attempts to negotiate deals with all of them by the end of the year.”
Now, the real question here is why other SWFs aren’t using their deep pockets for these types of investments…
Back in February, I noted that Temasek may be launching an innovative investment vehicle that would act as a sort of ‘externally managed sovereign hedge fund’. With a tentative name of SeaTown (which is English for Temasek) and Charles Ong at its helm, the new ‘SHF’ was purportedly going to be wholly owned by Temasek and invest in a diverse range of assets and geographies. But at the time that was all just speculation, as Temasek was keeping pretty mum about the whole thing.
Well no more — Temasek’s 2010 Annual Report has a few more details about its SeaTown venture:
“We established SeaTown Holdings, a wholly-owned global investment company, with committed capital of over S$4 billion. SeaTown operates and makes its investment decisions independently, with reciprocal co-investment rights between Temasek and SeaTown. SeaTown is intended as a co-investment platform for sophisticated investors in the medium term.”
Temasek’s Executive Director Simon Israel also discussed the new entity at a press conference. Apparently, the idea was to create an entity that invests both public money (i.e. Temasek’s money) and, eventually, private sector money:
“SeaTown is a test bed, if you will, to explore how this can be done in a sensible and sustainable manner.”
In short, the plan is to invite private institutional investors to co-invest in SeaTown in roughly 3-5 years’ time, with retail investment potentially available in a decade or so.
All in all, I think this is a pretty fascinating development, but it still begs a fundamental question: Why did Temasek go to the trouble of setting up an external institutional investor to invest in stocks and bonds when most people (at least in the West) probably think that this is exactly what Temasek is already doing?
I see a variety of possibilities, of which I’ll address just one: Temasek may be trying to dodge the SWF stigma. As Jan Randolph of IHS Global Insight argued today:
“In some ways [Temasek] wants to dilute its sovereign wealth fund-type genetic identity by managing private funds.”
In other words, if you are predisposed to think that Temasek is scary just because it’s a SWF, then the hope may be that you won’t be afraid of SeaTown — the independent, private and commercial ‘SHF’ that manages public and private money. In this manner, Temasek may want to have their investment strategies “blessed” by private and commercial investors to ensure that international and domestic audiences grant them legitimacy. It’s an interesting strategy.
Over the past year or so, I’ve been watching with interest the evolution of the “entity” that is now known as “Invest AD”. Its origins go back to 1977 with the creation of the Abu Dhabi Investment Company. One of the UAE’s first SWFs, ADIC had an explicit mandate to invest on behalf of the government. However, ADIC was given a new mandate in 2007 to attract and manage third-party assets with a view to facilitating regional development. And in order to reflect this new focus, ADIC changed its name to Invest AD in mid-2009. In a sense, the fund was changed from a SWF into a “private” regional asset manager; albeit with a new mandate that remained closely aligned with Abu Dhabi’s plans and policies. Indeed, Invest AD plays into a broader plan (i.e. the “Abu Dhabi 2030 Vision”) to develop UAE’s financial services industry.
Today, Invest AD attracts cash from all over the world for investment almost exclusively in the MENA region. For example, it announced last week that it was launching a second PE fund targeting MENA. The government will invest $75 million and Invest AD expects to raise $325 million from outside investors. In addition, Invest AD is planning to list on a major stock exchange in the next few years. If successful, this would would represent a remarkable transformation; one of the oldest SWFs, which is to this day owned by the Abu Dhabi Investment Council, may soon be a publicly traded asset manager, akin to State Street or JP Morgan.
Part of the reason I’ve been so interested in Invest AD’s evolution is because I think Singapore may be copying the UAE’s moves. In the same way that the Abu Dhabi Investment Council has spun off Invest AD, so to has Temasek spun off Seatown. Both Invest AD and Seatown are “private” institutional investors that are (or will be) open to third-party investors. I can see a variety of reasons for why these SWFs are setting up these new companies:
Whatever the case, the evolution of Invest AD and the unveiling of Seatown have been interesting developments over the past year that are worth paying watching.
China’s State Council has apparently given the green light to a new state-owned asset manager called Guoxin Asset Management (GAM) (…we had previously been calling this entity “CIC 2.0”…). The new firm is domestically focused and owned by SASAC. According to the China Daily:
“…the new entity will be a domestically oriented sovereign wealth fund set up by SASAC to better manage State-owned assets in the industrial sector, similar to the role of CIC that manages part of the country’s foreign exchange reserve in the financial sector.”
GAM will thus join Chengtong and the State Development Investment Corp as SASAC owned investment managers. GAM will facilitate the restructuring of SOEs by consolidating and reorganizing them; the hope is that it will turn small and unprofitable SOEs into viable and profitable enterprises. Through this process, the expectation is that the number of SOEs will drop from 128 to around 80. As such, this new “SWF” will largely resemble the Temasek of old (i.e. circa 1970s) in that it will be inheriting some unprofitable companies and have to untangle some pretty messy conglomerate structures.
Unlike CIC and SAFE, those outside of China are unlikely to hear much about GAM, according to Michael McCormack. Indeed, the new entity should have no budget for international investments at all nor any mandate to make them; it is almost 100% domestically-oriented. If you haven’t heard of Chengtong to date, you won’t be hearing much about GAM in the future.