Subject: Re: Investment: Rainy day funds recast (SWF) - FT
From: "Michael Andrews" <[email-masked]>
To: <[email-masked]>
Cc: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Curtis Hastings" <[email-masked]>, "Devon Archer" <[email-masked]>
Date: Tue, 19 Oct 2010 09:47:53 -0400

You got it> I think there are move has expanded the need for product.

On Oct 19, 2010, at 9:22 AM, [email-masked] wrote:

> This is great.  Their desire for more short term returns and greater  
> risk is an important strategic shift.
>
> Sent from my Verizon Wireless BlackBerry
>
> -----Original Message-----
> From: Michael Andrews <[email-masked]>
> Date: Tue, 19 Oct 2010 09:18:23
> To: Hunter Biden<[email-masked]>; Eric Schwerin<[email-masked] 
> >; Curt Hastings<[email-masked]>; Neil Callahan<[email-masked] 
> >; Devon Archer<[email-masked]>
> Subject: Fwd: Investment: Rainy day funds recast (SWF) - FT
>
>
>>
>> Investment: Rainy day funds recast
>> By John Plender
>> Published: October 18 2010 22:32 | Last updated: October 18 2010  
>> 22:32
>>
>>
>> Rethinking risk: SWFs such as that of Singapore have responded to
>> the global financial crisis by taking on more risk, increasing their
>> exposure to equities
>> Up until three years ago, they were widely demonised as a possible
>> threat to western security. Then they became saviours of first
>> resort to the world’s ailing banks. Today many of them are chastened
>> but on the mend.
>>
>> Sovereign wealth funds – managers of an estimated $3,000bn-$4,000bn
>> of government-owned investments – have not had a uniformly good
>> crisis. “In 2007 and 2008, [they] proved to be neither an
>> unqualified threat nor an unqualified salvation for anyone
>> involved,” says Edwin Truman of the Washington-based Peterson
>> Institute for International Economics, author of a new book on the
>> funds.
>>
>> While the most heavily publicised hits are the result of ill-timed
>> investments in such financial giants as Citigroup, Merrill Lynch,
>> Morgan Stanley, Blackstone Group and Barclays, more lasting damage
>> may come from the hijacking of the funds by their own governments.
>> The SWFs of Kuwait, Qatar, Russia, China, Kazakhstan and Ireland
>> have together put more than $100bn into propping up troubled
>> domestic banks and collapsing markets. Further raids on national
>> nest eggs cannot be ruled out.
>>
>> Some funds have also been hijacked by public opinion. As ordinary
>> people have watched them losing money in western banks, they have
>> begun to complain angrily – not least in China, where nationalistic
>> feelings can run high – that public money is being squandered on
>> foreign ventures. Many of the governments behind SWFs are
>> authoritarian and undemocratic but they they are not immune from
>> such heat. Following lossmaking investments in US banks, China
>> Investment Corporation (CIC), for example, is rumoured to be under
>> pressure from Beijing to take on more risk to improve short-term
>> performance.
>>
>> These powerful investors are now rethinking their approach to
>> portfolio management and to risk – and the consequences will be far-
>> reaching. Given their size and potential for growth, this will have
>> a profound im pact on the valuation of global financial assets and
>> on volatility – while continuing to raise security concerns in the
>> west. At the very least, their behaviour since 2007 casts doubt on
>> claims that the funds are invariably a stabilising factor in global
>> markets.
>>
>> Before the crisis, big SWFs – their portfolios often managed like
>> pension funds – tended to be “buy-and-hold” investors with a long
>> time horizon and, in most cases, no liabilities.
>>
>> Come the crisis, however, many of these “rainy day” savings funds
>> turned, in effect, into stabilisation funds to address problems in
>> their home economies and financial systems. Because of the
>> unexpected call on their liquidity, they ran into problems like
>> those faced in 2007-09 by US university endowment funds hit by cash
>> calls from their private equity investments. The enforced
>> repatriation of funds meant pulling out of international markets at
>> a point when they were very depressed.
>>
>> Research from Harvard University and Massachusetts Institute of
>> Technology suggests that market timing is actually a long-standing
>> problem. Examination of 2,662 investments by 29 SWFs between 1984
>> and 2007 indicates that they engage in a form of trend-chasing,
>> whereby they invest at home when domestic equity prices are higher
>> and invest abroad when foreign prices are higher. It also appears
>> that, where politicians are directly involved in management, the
>> fund is more likely to buy high and sell low.
>>
>> A further change in direction stems from the decision by a number of
>> funds to borrow. Over the past two years Mubadala of Abu Dhabi,
>> Mumtalakat of Bahrain, Temasek of Singapore, Khazana of Malaysia and
>> CIC’s Central Huijin subsidiary have all made bond or note issues
>> totalling more than $30bn. Whether the resulting need to repay
>> lenders will bring further pressure to shorten investment horizons
>> is unclear, since many of these funds are pursuing private equity-
>> type investments where borrowing is the norm.
>>
>>
>> In fact, a number of SWFs have responded to the crisis by taking on
>> more risk – which they have a greater capacity to absorb, thanks to
>> their long-term time horizon. For a fund investing resource
>> windfalls for future generations, heavy exposure to ultra-safe bonds
>> would entail paying for liquidity it does not need. So oil-rich
>> Norway has increased its exposure to equities, as has Government of
>> Singapore Investment Corporation (GIC).
>>
>> Others have chosen to retrench. In 2007 Chile’s funds were preparing
>> to reduce their exposure to low-risk government bonds and put more
>> into corporate paper and passively managed equities. But the plans
>> were put on hold as a result of the credit crunch. Rather than
>> seeking to maximise returns, the country has reverted to running a
>> pure stabilisation fund to address the impact on the economy of
>> fluctuations in the copper price. In Russia and Kazakhstan, too,
>> SWFs have curbed their risk appetite.
>>
>> Yet in many cases there has been an erosion in the clarity of
>> investment objectives. SWFs typically have three very different
>> policy mandates: stabilisation; long-term saving; and economic
>> development. This is the sector’s “impossible trinity”, according to
>> Andrew Rozanov of alternative asset manager Permal Group, who coined
>> the term sovereign wealth fund.
>>
>> WEALTH OF NATIONS
>> Abu Dhabi
>> Outside estimates put the value of the opaque Abu Dhabi Investment
>> Authority, the world’s biggest sovereign fund, at upwards of $600bn.
>> The portfolio includes quoted equities, fixed income, property,
>> infrastructure and private equity, with global equities the biggest
>> category. The aim is to secure the welfare of the emirate and
>> provide stabilisation funding when necessary. Adia does not seek
>> active management or control. About 60 per cent of the portfolio is
>> in index-replicating assets. It is suing Citigroup over losses on
>> its $7.5bn purchase of shares in the bank in 2007.
>> Russia
>> In 2008 the Oil Stabilisation Fund, managing state-controlled energy
>> groups’ revenues, was split to recognise its different functions:
>> one managing official reserves; the other, which became the National
>> Welfare Fund SWF, making higher risk investments. The purpose of
>> this SWF is to smoothe fluctuations in energy revenues and to fund
>> pensions. But during the financial crisis, when foreign capital fled
>> the country, it sold foreign investments to plug the budget deficit,
>> support the mortgage market and prop up domestic share prices. It is
>> reportedly worth just under $40bn.
>> Norway
>> The aim of the Government Pension Fund Global is to manage national
>> petroleum wealth and to meet rising public pension liabilities;
>> while also preventing the “Dutch disease” – whereby windfall
>> revenues lead to an overvalued exchange rate that distorts the
>> domestic economy – taking hold. The $510bn fund is split 60/40
>> between foreign equities and bonds. It takes contrarian views,
>> recently buying Greek government bonds; and ethical views, excluding
>> from the portfolio in August two Israeli companies involved in
>> developing Jewish settlements in occupied Palestinian territory.
>> Singapore
>> Temasek – the smaller of the country’s two SWFs, with $144bn under
>> management – is one of the rare funds in the sector that aims to
>> engage with the boards and managements of the companies in which it
>> invests. Of its portfolio, 32 per cent is invested in Singapore,
>> with 46 per cent in the rest of Asia (excluding Japan). It attracted
>> headlines by incurring big losses on the sale of holdings in Bank of
>> America and Barclays but has fully recouped the ground lost in
>> 2008-09. It boasts a total shareholder return of 17 per cent a year
>> since it was set up in 1974.
>>
>> “A state-owned fund may be successful in pursuing two but rarely, if
>> ever, all three of the objectives,” he says. Stabilisation calls for
>> very safe, liquid assets that offer low returns. A long-term savings
>> fund requires less liquid, higher-risk investments that offer higher
>> rewards. “These two policy mandates push in opposite directions,”
>> says Mr Rozanov. “The worst outcome is to chase after yield in the
>> good years and scale back risk dramatically during the bad years.”
>>
>> Where stabilisation and long-term saving have been combined, as at
>> Abu Dhabi Investment Authority and GIC of Singapore, the funds have
>> been so large that they have been able to keep a big allocation of
>> liquid assets as part of a long-term investment and wealth
>> management objective.
>>
>> In the case of Ireland and Kazakhstan, by contrast, the financial
>> crisis led to the funds adopting all three functions, including
>> economic development, where the illiquid and risky nature of the
>> investments sits uncomfortably with stabilisation. This, argues Mr
>> Rozanov, is unsustainable.
>>
>> Perhaps the worst conundrum is that so many funds face an impossible
>> remit. Saddled by their governments with unpredictable cash calls,
>> they must identify assets to match liabilities that are unknown and
>> therefore unquantifiable. There is no wholly satisfactory answer to
>> that challenge.
>>
>> One concrete achievement of these investors since 2007 has been to
>> fend off the threat of financial protectionism that stemmed from
>> western fears that untransparent SWFs would become instruments for
>> political and economic power play. This is partly thanks to
>> investors such as China’s CIC carefully eschewing sensitive
>> investment in the defence and technology sectors. But it also
>> reflects the development of a set of voluntary standards to improve
>> transparency and accountability. Work by Mr Truman helped inspire
>> the Santiago Principles, which enshrine a set of principles and
>> practices agreed by leading SWFs under the auspices of the
>> International Monetary Fund. They include a commitment to invest on
>> purely economic and financial criteria.
>>
>> In the view of one expert observer, this has resulted in no more
>> than soft enforcement of soft law. Certainly the quality of
>> disclosure by the big funds remains mixed, with virtuous Norway at
>> one end of the spectrum and some more reticent Middle Eastern and
>> Asian funds at the other.
>>
>> So, following the turbulence of the crisis, do SWFs remain
>> controversial? Because they are government-owned, they will always
>> raise concerns about political motivation. Increasingly they are
>> engaged in a mercantilist dash for food and energy security. In
>> addition, their rapid recent growth is a by-product of global
>> imbalances that are growing more dangerous. Those countries that
>> have been holding down exchange rates to enhance export
>> competitiveness have piled up huge official reserves that have then
>> swollen the coffers of their SWFs.
>>
>> A new World Bank report compares this development to the aftermath
>> of the oil crisis of the 1970s, when producer states’ energy
>> windfalls were recycled to developing countries. This time, however,
>> money is not being deposited in banks but invested chiefly in bonds.
>> And many savings-glut countries are seeking to boost returns by
>> channelling money into SWFs that invest in equities. These provide
>> more stable flows than in the earlier episode. The equity component
>> is particularly welcome since the last thing over-indebted recipient
>> countries such as the US and UK need is yet more debt. So, while
>> imbalances remain unhealthy, the more they are recycled via equity,
>> the less malign the outcome.
>>
>> The World Bank also argues that SWFs have the potential to boost
>> global wealth between 2010 and 2020 by helping recycle surplus
>> country savings towards more productive investments in the
>> developing world. Excluding China and oil leading exporters,
>> developing countries are on average net importers of capital and
>> will continue to depend on external savings to finance critical
>> investment.
>>
>> As to whether the SWFs of savings-glut countries enhance welfare at
>> home, it depends on what they do. According to Eswar Prasad of
>> Cornell University, well run SWFs that smoothe fluctuations in
>> natural resource revenues or invest windfalls for future generations
>> may be beneficial. But SWFs can also hinder domestic market
>> development, he says. Since savings outflows are managed by the
>> state, there is no need, for example, to give private citizens
>> access to developed financial markets.
>>
>> Whether the funds grow or shrink in future largely depends on the
>> fate of global imbalances, as well as the movement of natural
>> resources and commodities markets. There are still potential new
>> entrants: Japan is considering establishing an SWF to raise the
>> return on its $1,000bn-plus official reserves.
>>
>> But if today’s currency friction escalates, the US and other
>> countries may impose restrictions on capital inflows. And if an
>> outbreak of trade protectionism prompts a retreat from export-led
>> growth in Asia and elsewhere, inflows into SWFs would shrink as
>> would the growth of official reserves. Lower global growth would
>> also reduce windfalls from natural resources and commodities.
>>
>> That said, not all deficit countries will want to bite the hand that
>> feeds them with capital. For their part, the SWFs have shown
>> themselves sufficiently unthreatening through the crisis to
>> guarantee that they will be around for a long time to come, whatever
>> the absolute size of the nest egg.
>>
>> THE WESTERN VIEW
>>
>> Sovereign wealth funds, around for nearly 50 years, have only
>> recently given rise to concern in advanced countries. Partly,
>> suggests Edwin Truman of the Peterson Institute, a Washington-based
>> economic think-tank, this is because their rapid recent growth in
>> developing countries reflects a shift in global economic power.
>>
>> Then there is the role of governments. Many of those behind the
>> funds are not traditional friends of the west, and there is a
>> growing fear that SWFs will be used for political and strategic
>> ends, especially since China joined in. Some worry that the SWFs
>> might introduce a new form of state ownership of strategic assets in
>> the developed world.
>>
>> A broader concern is their lack of transparency, which raises
>> questions about potential market abuse. Some western fund managers
>> also argue, paradoxically, that a lack of activism could become a
>> problem, creating a governance vacuum. Certainly the governance of
>> the funds, with notable exceptions such as that of Norway, tends to
>> lack accountability to the populations of their countries.
>>
>> Yet many of the criticisms aimed at SWFs are hypocritical. The
>> investment policies of US state pension funds, such as Calpers, the
>> Californian state employees’ fund, for example, have been overtly
>> political and pro-union.
>>
>> Meantime, the SWFs have trodden the political minefield with
>> relative delicacy. The China Investment Corporation, for example,
>> takes stakes of more than 10 per cent in companies only with their
>> agreement and avoids sensitive sectors such as defence.
>>
>> At any rate, where developing countries want to invest
>> strategically, say, to secure access to natural resources, they have
>> other means available. In its attempt to derail Anglo-Australian
>> miner BHP Billiton’s bid for PotashCorp of Canada, China has used a
>> corporate vehicle, Sinochem, not one of its SWFs.
>>
>>
>
>

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