Archive for July, 2008

SWF Blog Roundup #2

by Brett Keller
A summary of some recent blogosphere offerings on sovereign wealth funds:

SWFs Lack Market Mastery: Daniel W. Drezner (professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University), “Sovereign wealth funds aren’t investing in the United States — and why that might be a good thing” at

Am I one of the people freaking out?  No, because I’m not convinced that sovereign wealth funds are all that good at picking winners in equity markets…

Japan’s Investments: Peter Drysdale, “Japan’s New Sovereign Wealth Fund?” in East Asia Forum: Economics, Politics and Public Policy in East Asia and the Pacific.

Reform is on the way in the management of Japan’s giant publically managed pension fund. Last year the fund lost Yen 5.65 trillion or US$48 billion…

Joint Ventures of SWFs: Rachel Ziemba, “GE/ Mubadala: More Partnership for Sovereign Wealth Funds” at RGE Monitor.

Private-equity style funds like the Qatar investment authority and funds of Dubai are also taking larger shares in foreign companies or setting up joint ventures.

Temasek: Doubling Down on Merrill Lynch

by Ashby Monk

Singapore’s Temasek is doubling its bet on Merrill Lynch, investing an additional $900 million (along with a rebate of roughly $2.5 billion on their past investment) into the struggling financial giant.

Given the widespread losses SWFs have had on US financial institutions over the past year, seeing another large, strategic investment is surprising.  Temasek had already lost roughly half of its past investment in Merrill.

On the flip side, Temasek could potentially be looking at a 15% stake in the U.S. giant when all is said and done. For those with a long-term view, this could be very attractive…

Let the (SWF) Games Begin

By Ashby Monk
As the Olympics get set to kick off, I thought it appropriate to return to the issue of China’s SWFs. Indeed, two interesting articles are worth a brief discussion.

Michael Cognato, of The National Bureau of Asian Research, was kind enough to send me his recent report on the CIC, which builds on an extensive review of publicly available information and data.

Specifically, I was very interested to learn a bit more about the internal functioning of the CIC. For example, Cognato gives some insight into the hiring of finance professionals. He argues that the initial plan was to pay market rates for finance staff, in order to ensure high levels of competency and professionalism. However, that plan was scrapped after other government officials objected. As such, CIC employees will earn below market rates. This is a tension likely evident in many SWFs’ hiring: how does a government agency attract staff to compete in a highly competitive, highly technical and highly remunerated industry?

Cognato also offers up a worthwhile discussion on the CIC Management Committee and Board of Directors. His main point revolves around the idea that the management committee is commercially oriented; they are “well-respected technocrats , several of whom have experience in managing government and private sector investments.” Moreover, he argues that these individuals have the clout within China’s political hierarchy to resist outside political pressure / corruption. As an aside here, Xi-Qing Gao has just been named a Trustee at Duke University, where he went to law school and is a Senior Lecturing Fellow. This perhaps illustrates Cognato’s point about being respected and extremely professional.

So, Cognato’s report helps to allay some of the fears associated with the CIC’s mandate: despite political foundations, his research suggests it is a commercial entity.

This is confirmed in a recent article by Michael McCormack at Z-Ben Advisors as well. However, while allaying fears about the CIC…he raises some about SAFE.  Nevertheless, McCormack argues that over time SAFE’s foray into high return investing will be short lived:

China’s State Council, recognizing the likely political implications of sovereign wealth investing, ensured that such investment would not be made by the same body responsible for currency management. By creating a new, single-purpose SWF investor – CIC – they could transfer SAFE’s surplus into the hands of an institution designed to pass foreign regulatory tests, able to articulate a long-term investment plan and capable of attracting portfolio design and management talent who have strong relationships with global asset managers.

In short, the above authors depict China as being sensitive to the fears of foreign governments with respect to sovereign investing. Moreover, CIC was established to allay foreign fears…not stoke them.

…now let the Games begin!

Q&A with Jason Mosley, Senior Africa Editor at Oxford Analytica

By Ashby Monk

This blog is a source of open discussion and engagement on the topic of sovereign wealth funds. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we offer the second installment of what we hope will become a routine segment: “Q&A with a SWF expert, stakeholder or policymaker”. We are pleased to welcome Jason Mosley of Oxford Analytica. While Mr. Mosley’s views are his own, his perspective helps to further debate and facilitate understanding.

Ashby Monk: Jason, can you give us a little bit of background about you, Oxford Analytica and explain your interest in SWFs?

Jason Mosley: Oxford Analytica is an international, independent consulting firm that does strategic geopolitical analysis for clients that range from governments to Fortune 100 firms. My role within the firm is Senior Africa Editor, which means I am in charge of all Africa related content in our Daily Brief. I’m increasingly interested in SWFs because SWFs are increasingly interested in Africa! Moreover, on a more personal level, I lived in Ethiopia for two years in the 1990s and recently returned for a two week trip. I was very interested to see the impact that some of the Gulf SWFs were having in areas where I had spent a considerable amount of time. It raised my awareness to the issue.

Ashby Monk: That’s interesting. We’ve actually had a series of blog entries about the potential role for SWFs in African development. By the sounds of things, this is a phenomenon that you have personally seen. Generally speaking, do you think SWFs will have a large impact on African development?

Jason Mosley: Well aside from my anecdotal experience, we first need to recognize that none of the SWFs that we at Oxford Analytica list in the ‘top 20’ are from Sub-Saharan Africa (SSA). In fact, using a very broad definition of what constitutes a SWF, SSA only has around $20 billion in SWF assets, which comes mainly from Nigeria and Botswana, with Uganda, Mauritania and Angola adding under a billion combined. So, this suggests that (like the investments I saw in Ethiopia), SWF investment will need to come from outside Africa. To me, this suggests we need to better understand the investment strategies of the largest SWFs — in order to evaluate to what extent the SWF phenomenon will aid/bypass the region.

Ashby Monk: Some have suggested that SWF investments in Africa could be based on political criteria. Do you see SSA bound investments by SWFs as being political or commercial?

Jason Mosley: It is interesting, the same characteristics that give Western politicians pause — the potential for non-financial factors influencing the investment decision — gives some African economies hope. Because SWFs do not have creditors, they may be willing to invest in SSA based on an investment valuation process that can be enlarged to consider financial, political, social or any other factor. As you well know, Ashby, traditional financial institutions are less flexible when making investment decisions: pension funds in particular must maximize financial returns. I don’t see SWFs as being bound by such a strict level of governance (i.e. fiduciary duty). So, maybe SWFs have more flexibility to consider extra-financial factors in their valuation process? Honestly, we still don’t know enough about their investment decision-making and how it will impact SWF investments in Africa…but it is interesting to think about.

That said, my personal experience and expectation is that SWFs are looking for profit in SSA. So, even though they may have more flexible valuation metrics, they will still be looking for returns. Nevertheless, Western fears about SWFs and the south-south links you mentioned in a previous post will still play into Africa’s favor. I’m confident that there will be a continuing SWF presence in SSA over the medium to long term.

Ashby Monk: What is your take on World Bank President Robert Zoellick’s suggestion that global SWFs allocate 1% of their portfolios to African investments?

Jason Mosley: Zoellick’s call dovetails nicely with the idea that SWFs could play a role in development, and based on current estimates of SWF size, this would put $30 billion in potential investment on the table (roughly equal to all Official Development Assistance to SSA, and nearly double FDI inflows, for 2006). This would clearly be a significant increase in capital flowing to the region. An important difference to ODA would be the commercial nature. It’s not clear whether Africa suffers from a lack of finance, as its economies are relatively small compared to other regions. Nevertheless, SWF investment could stimulate sectors of the economy normally underserved by existing FDI, which is dominated by the extractive sector, and focused geographically in a handful of commodity exporting countries. In the search for returns, and with a different risk tolerance and valuation method, SWF investments could have significant knock on effects. The flip side of Zoellick’s call was his interest in a role for the Bank in steering SWF investments through Bank managed funds — this points to a key bottleneck for potential SWF investment in SSA: lack of local knowledge for good investment opportunities. It’s not just a problem for SWFs, and while the World Bank may be in a position to provide a steer, I’m not sure SWFs are ready to be guided (nor that they should be).

Ashby Monk: What types of investments do you see SWFs favoring in SSA?

Jason Mosley: One of the primary investment needs of SSA is infrastructure. Unleveraged, long-term investors such as SWFs are particularly suited for this type of investing. Through public-private partnerships, these investments can be particularly lucrative in politically stable countries, and even in some countries often considered slightly less stable (such as Nigeria or Angola).

One area where we’ve definitely seen investment has been in real estate, usually focused on serving the tourist sector. This is true in areas already associated with international tourism, such as Cape Town in South Africa, but also in less high profile destinations, including Rwanda.

Also, we’ve seen investment in sectors such as transport logistics in SSA, including in Djibouti and Senegal, where Dubai World has major investments in port infrastructure. In these cases, SSA countries have welcomed (in Senegal’s case actively pursued) the very SWF that was blocked from investing in US ports because of US political concerns about Dubai’s agenda.

Ashby Monk: Thanks, Jason, for taking the time chat with us today.

Summer Reading

By Ashby Monk

Encouragingly, some interesting research on SWFs has been released recently. So, for those with an appetite for academic working papers and industry research, the following may offer some good pool-side reading:

First, Olivia Mitchell, John Piggott and Cagri Kumru have just written an interesting paper on public investment funds. Prof. Mitchell has a long publication record looking at the governance of public pension funds, so it is natural to see her and colleagues move into SWF governance as well.

Second, David Marchick and Matthew Slaughter recently released a Council Special Report at CFR on Global Policy towards FDI. While the general theme of the report is investment protectionism, it has some interesting insights on SWFs.

Third, I came across an interesting paper by Curtis J. Milhaupt on SSRN that compares the current fear of Chinese investment in the U.S to the fears associated with Japan Inc. in the 1980s. Given that this was a topic that came up frequently in our first series of meetings in DC, Milhaupt’s contribution is a welcome one.

Finally, MGI has just released a study on ‘The New Power Brokers’, which includes SWFs. It has some interesting data, which is great considering the general dearth of information out there.

Happy reading…

SWF Blog Roundup #1

by Brett Keller
A summary of some recent blogosphere offerings on sovereign wealth funds:

Rationale for investing: Helmut Reisen, “How to spend it: Sovereign wealth funds and the wealth of nations” at RGE Monitor.

Development economics points to four major motives for countries to run such funds…

Investing in the US: Tom Taulli, “Sovereign wealth funds: Still an appetite for US financial institutions?” at BloggingStocks.

So far, sovereign wealth funds have had bad luck with investments in U.S. financial institutions such as with Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER)…

Nigeria’s fund: Solomon Sydelle, “Nigeria’s Sovereign Wealth Fund” at Nigerian Curiosity.

Nigeria’s Sovereign Wealth Fund (SWF) was one of the fastest growing in 2007. The SWF grew at a rate of 291%…

Investing in India: Sanjiv Shankaran: “No threat from Sovereign Wealth Funds, says Finmin” at

New Delhi: Four months after it set out to find whether foreign sovereign wealth funds (SWFs) pose a threat to India’s interests, the country’s finance ministry has decided that they don’t…

Q&A with Thomas Karol of the Sovereign Investment Council

By Ashby Monk

This blog is a source of open discussion and engagement on the topic of SWFs. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we are introducing the first of what will hopefully become a routine segment: “Q&A with a SWF expert, stakeholder or policymaker”. We are pleased to welcome Thomas Karol of the Sovereign Investment Council. While Mr. Karol’s views are his own, his perspective helps to further debate and facilitate understanding.

Ashby Monk: Tom, what is the purpose of the Sovereign Investment Council?

Thomas Karol: The Sovereign Investment Council (‘SIC’), based in Washington, DC, is an advocacy, communications and research center established to develop, analyze and distribute information about Sovereign Investors and their contributions to the national and global economies. Sovereign investors have not risen to address the chorus of fears voiced in Washington over the past year, resulting in numerous Congressional hearings and calls for action. As EU trade commissioner Peter Mandelson has said, the funds risk getting the facts right and the politics wrong. The SIC is working to ensure that the facts are better known and the politics better managed.

Ashby Monk: Why do sovereign wealth funds need a lobbyist?

Thomas Karol: Some SWFs have hired major lobbyists in DC to meet their own needs, at great expense to the funds and – as we have heard from many members of Congress – with little real impact. It is fairly unrealistic in today’s climate to expect any one fund to get any special treatment in Washington, as any anticipated regulatory or legislative action will address all SWFs equally. The SIC is not representing any single SWF, but rather is working to be the trade association for sovereign investors, to promote public understanding, and otherwise advance the interests of sovereign investors and their advisers.

Ashby Monk: What are the primary issues of concern among US policymakers with respect to SWFs? How can these issues be overcome?

Thomas Karol: The primary issue of concern among US policymakers is the unsupported fear that SWFs may operate to advance political motives, rather than economic investment goals. The size and growth of SWFs – particularly in nations with fewer ties to the United States – and their relative lack of transparency feed fears that SWFs can take over US businesses, manipulate financial markets and steal technology and other national security assets. The first step in addressing these fears is to better educate US policymakers and to provide more information about how SWFs can and do operate.

Ashby Monk: Is mutual understanding and communication the key to SWF legitimation?

Thomas Karol: There seems to be a growing level of polarization between SWFs and investment receiving countries, which advances the interests of neither. There are complex issues of national pride and changing global economics that can only be addressed by education and communication. That is the central focus of our efforts. Anyone interested in more information can check out our website and contact me directly.

Ashby Monk: In your experience, are SWFs effective at communicating with investment receiving countries?

Thomas Karol: Many SWFs are beginning to see the real value of communicating with investment receiving countries, as well as companies in which investments are sought. Several have hired communications professionals, revamped websites and begun more discussions with media. While this is positive at an individual fund level, we believe that a great deal more needs to be done at the SWF industry level. Policy makers and opinion leaders tend to take the industry as a whole and may take actions based upon their worst fears.

Ashby Monk: Take us out ten years, where do you see the current crisis of legitimacy facing certain SWFs?

Thomas Karol: Crystal ball gazing is always dangerous, but I do think it is clear that there will be far more funds in ten years and the predicted $12 trillion in SWF assets will be surpassed. I think that SWFs and regulators will take steps back and explore more market based solutions that permit investment without the fear factors. There is always the potential for misuse and abuse by some SWFs, but we anticipate sovereign investors becoming a far more mainstream part of the financial community. Mostly, I think that there will be more market based, commercial solutions to the present issues and the SIC is focused on promoting such solutions.

Ashby Monk: Thanks, Tom, for taking the time speak with us today.


This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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