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Are SWFs The New Endowment Model?
Greg bright of top1000funds.com reports, New endowment model: follow the SWFs:
Some
sort of shape is starting to take place, post-global crisis, as to how
the biggest, longest-term investors are spending their money. If the
endowment model was the one to follow for the past 20 years, the
sovereign wealth fund model may be the one to follow for the next.
Endowment-envy
swept the world in the early part of this decade, which was probably a
decade too late to reap the benefits from following the very clever
investment strategies of the likes of Yale and Harvard. By the time of
the global financial crisis, the envy had faded.
But investors
should think about why the endowment model of investing worked so well
for as long as it did. If we can isolate the good things and then
transport them to the post-crisis world, a new and better model may
emerge. And, as always with investing, if the strategy is right, those
in first will be rewarded.What the big endowments did was invest
directly, with their own teams of specialists and professionals, in
areas where they had particular expertise, such as private equity and
real estate. They then laid off the other parts of their portfolio in
much the same way as big pension funds do anywhere, with a mix of
growth and defensive allocations.
The
problem was that in the crisis, correlations all went to one, and
liquidity became a big issue. Endowments usually have to pay some
income each year to their associated institution (such as a university),
the same as a pension fund does with its retirees. But endowments
don’t have a sponsor to top up the pot after one or two negative years.
They have to rise and fall on their own merits.
Sovereign
wealth funds are also a mixed bag of investors. Some of them have
target dates for delivering on returns, some have target returns over
various periods. Some are just set up to “make money” for the country
by investing resources or foreign exchange reserve build-ups. Some are
very transparent, others remain opaque.
What they have in common,
though, is a single shareholder – a government – with a legislated
genuine long-term aim for the fund’s investments.
Their
investments, over the past 10-or-so years when the SWFs around the
world have started to attract headlines, have also been a mixed bag.
But a common element is the desire to take significantly large stakes
in companies or other assets which reflect a long-term theme.
SWFs
have, for instance, waded into hostile takeover battles for resource
companies. They have invested directly in big infrastructure projects.
And they have backed IPOs of established businesses which are targeting
future growth areas.
This thematic
focus has exacerbated political concerns about some SWFs being too
nationalistic. Those from resource-importing countries taking big
positions in resource exporters can be perceived as politically
inspired. Or not.But all investors
can identify themes and direct their asset allocation accordingly. SWFs
have the added advantages of fire-power to get a seat at any table and
the inhouse resources to analyse and negotiate their positions.
A
classic example of a thematic direct investment by a SWF from a
resource-importing country, China, was written up last week in a client
newsletter by HSBC, the global bank and fund manager.
In its
case study, HSBC focused on a food stock which encompasses the two
themes of globalisation and increasing demand for higher-protein food.
The stock is Noble Group, based in Hong Kong and listed in Singapore.
Last year, the China Investment Corporation, China’s $300 billion SWF,
bought 15 per cent of Noble for $850 million.
Noble has
operations in a lot of countries, vertically integrating its business
and clipping the ticket at various points. It started life as a
commodities trader but has grown into a supply chain manager of
agricultural and energy products. One of its products is soya beans.
Soya
beans, which have East Asian roots through history, are grown now
mainly in South America and used for a range of products from animal
feed and edible oils to soaps and biodiesel fuel.
Noble sells
fertilisers to the South American soya bean farmers, buys the grain
from them, stores it in Brazil and Argentina, crushes it, ships via its
Noble Chartering subsidiary around the world – including China, which
takes 37 per cent of the output – and sells to wholesalers.
Ricardo
Leiman, Noble’s Brazilian-born chief executive, was quoted in the HSBC
newsletter as saying that Noble and CIC will continue to look together
for investment opportunities.
The biggest
advantage SWFs have is deep pockets, which allows them to ride out any
crisis in the short-term. The biggest problem they have is governance --
too much political interference in their operations and too little
transparency. The slide below was taken from a speech David Denison,
President & CEO of the Canada Pension Plan Investment Board (CPPIB),
made back in June, Fixing the Future: How Canada Reformed Its National Pension Plan.
Despite
these shortcomings, SWFs are a power to be reckoned with. They provide
huge liquidity to all sorts of markets, both public and private. Mr.
Bright wrote another interesting article in early October, GIC signals five emerging markets for future growth:
The
Government of Singapore Investment Corporation (GIC) has signalled a
further shift towards selected emerging markets and to private markets,
in its annual report published last week.
GIC has highlighted five emerging markets in particular for medium-term growth: China, India, Brazil, South Korea and Taiwan.
But
Ng Kok Song (pictured), GIC’s chief investment officer, was quoted
after a press briefing on the annual report, as saying the sovereign
wealth fund would favour private markets over listed equities for its
increased emerging markets exposure.
At the end of its March
fiscal year, the broad asset allocation for GIC, which invests the
country’s foreign exchange reserves, was: 51 per cent listed equities,
20 per cent bonds and 25 per cent alternatives. Geographically,
investments were spread: 36 per cent in the US, 30 per cent in Europe
and 24 per cent Asia.
Ng said that
about 80 per cent of GIC’s emerging markets exposure would be accounted
for the three BRICs (excluding Russia) and Korea and Taiwan.
He
said the fund would not necessarily be taking the well-trodden path of
public markets for its exposures, but rather look at real estate,
private equity and infrastructure.
GIC reported a total investment return of 7.1 per cent for the year, against 5.7 per cent the previous year.
The
fund, established in 1981, has a 20-year investment horizon mandated
by the Singapore Government. It tends to invest more widely than the
other Singapore sovereign fund, Temasek Holdings, which has
concentrated more on the Asian region.
Tony Tan, GIC’s deputy
chairman, said: “GIC started to selectively take on more risk from the
second quarter of 2009, amidst growing confidence in the economic
recovery. I am pleased that the 20-year return of the portfolio has
improved.”
I wonder how many more SWFs
"started to selectively take on more risk from the second quarter of
2009". If this is the case, then expect a flurry of activity in private
and public markets as the economic recovery takes hold. To ignore these
deep pockets of liquidity is foolish.
Finally, Amanda White of top100funds.com reported in late September, Conservative overweighting hinders world’s largest investor:
An
overweight allocation to domestic bonds has not helped the world’s
largest investor in the June quarter, with a massive $42 billion shaved
off the assets of the ¥116,802 billion ($1.37 trillion), Government
Pension Investment Fund of Japan (GPIF).
The
fund’s ¥10 trillion exposure to international equities was the main
contributor to the negative performance, with that asset class
returning -17.43 per cent. Domestic stocks, also underperformed with a
-13.93 per cent return for the quarter.
The
GPIF has a 72 per cent allocation to domestic bonds, up slightly from
the year before, and above its target position of 67 per cent. It also
has another 8 per cent in international bonds.
The fund has
allocations of 10.87 per cent in domestic equities and 9.11 per cent in
international equities, and is most underweight in short-term assets,
where its target is 5 per cent, and its allocation is short of 1 per
cent.
Last financial year, ending
March 31, international equities were the main positive contributor to
performance, with a massive 46.11 per cent. The total fund return for
the year was 7.9 per cent
Most of the assets are managed
passively, and last financial year (ending March 31, it reduced its
weighting to actively managed international equities, widening the
number of service providers at the same time.
Overall the fund employs more than 80 funds managers.
I get nervous when I see funds massively overweight domestic or international bonds. I reread Niels Jensen's excellent comment, Insolvency Too, and paid particular attention to this passage:
Entire
countries may have to (read: will) default on their pension obligations
either overtly or covertly. A few countries have already started to
adapt to the new reality by delaying the retirement age by a year or
two; however, in order to solve a problem of this magnitude, we need a
work force that is prepared to work until the age of 75. Expect some
hard fought battles in the streets of Paris, Madrid and Athens!
The
casino solution Interestingly, there is a solution. Solvency II does
not require for insurance companies to hold any capital against EEA5
government bonds. As pointed out by Deutsche Bank in a recent research
paper6, this looks an extraordinarily brave decision by the regulator,
considering recent developments in peripheral Europe. But rules are
rules. If you can see your pension fund sinking like the Titanic, but
you know you have a good shot at saving the ship, if only you fill up
the portfolio with high yielding government bonds, it must be very
tempting to stuff your portfolio with Greek (10-year currently yielding
10.7%), Irish (6.6%), Portuguese (6.4%) and Spanish (4.1%) government
bonds. It is one heck of a gamble but, then again, desperate people do
desperate things.
At least one Spanish
pension fund is already into this game. The €64 billion state pension
fund, Fondo de Reserva, recently revealed that they expect to have 90%
of their assets tied up in Spanish government bonds by the end of this
year, up from about 50% in 2007. Expect this sort of behaviour to
spread. It is a gamble many pension providers will be prepared to take,
as the alternative is not that exhilarating either. Let’s just hope for
the sake of millions of Spanish workers that the pension fund knows what
it is doing. Unfortunately, Murphy’s Law has an unpleasant habit of
popping up at the most inconvenient of times.
I
seriously question why any pension fund would shift 90% of its assets
to domestic government bonds. It's beyond stupid, it's actually criminal
and violates basic principles of fiduciary duty. When the biggest bond
bubble in history pops, these funds are going to get slaughtered. And
amazingly, they think they're reducing risk. They're in for a nasty
surprise!
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Hope the SWF's are not any kind of model. Corruption oozes from their every pore. (Canada is probably an exception; only typical government mediocrity oozes from the CPP's pores). But in Singapore, for example, Temasek and GIC are posterboys for fiduciary abuse by the Lee family dynasty. How much abuse? That's a state secret, disclosure of which will attract bankruptcy (and a caning) from the sick fucks. Other people's money, a state monopoly and no accountability. What could possibly go wrong?
Hey where are the endowed single white female models? Leo???
Sweet dreams...and I do mean sweet. :)
That's the best 'comment' I've seen you submit in the last couple of months...
Lol! Give me a break! Guess you aren't buying the dips! ;)