Archive for March, 2009

South American SWFs Tapped

Ashby Monk

It seems that wherever SWFs are found, sponsoring governments are looking to tap these funds to finance much needed economic stimulus packages. This trend has apparently made it to South America: according to the WSJ, Brazil sees its SWF as an important mechanism to pump funding into the economy while maintaining fiscal balances, while Chile will use funds from one of its two SWFs to fund its fiscal stimulus.

This is a recurring theme as of late — SWFs as ‘insurers of last resort‘. However, not all SWFs were set up with this objective in mind. Indeed, some SWFs were set up to fill future PAYG pension gaps or share ephemeral commodity revenues across generations. This then begs the question: are some SWFs being asked to do things that run counter to their original mandates? Given the scale of the crisis, SWFs will need very robust governance systems to avoid being recruited onto the stimulus team.

One fund I know won’t be tapped for short-term fiscal stimulus: the Australian Future Fund. According to my co-author Gordon Clark, the Future Fund is beyond the reach of politicians. In his recent paper, he notes:

“There is an ever-present temptation that faces the nation-state sponsors of sovereign wealth funds: the option of spending the assets for current political advantage and legitimacy…The [Australian] government faced squarely the question of political temptation and in response instituted a model of governance that could be thought to have ‘tamed’ politics.”

Temasek’s Goodyear is Rolling

Ashby Monk

If you haven’t been following the internal debate going on in Singapore over the appointment of the first foreigner — Charles Goodyear — to run Temasek, you should start. As I mentioned in a previous post, many SWFs are increasingly hiring foreigners and the influence of these individuals remains a concern in some countries. In Singapore’s Parliament last week, the Goodyear appointment was raised:

“Is the government not worried that the national interest could be jeopardised by having a foreigner CEO who will have a complete overview of Temasek’s strategy and operations?”

The answer appears to be ‘No’. Goodyear will undoubtedly be subject to countless contractual provisions that ensure his interests fit with the interests of the Government of Singapore. Moreover, there are clear benefits to bringing in an outsider.

The obvious benefit is that Goodyear — like the many other foreigners working for SWFs — will bring important skills and knowledge perhaps not readily available in Singapore. However, there is another benefit. By hiring individuals seen to be ‘trustworthy’ in the West — he previously ran the world’s largest mining company — SWFs can acheive international legitimacy. I don’t want to get overly academic here, but an institution can gain legitimacy in a certain jurisdiction by bringing within the organization individuals already seen to be ‘legitimate’ in that jurisdiction. This is known as legitimation through cooptation; and it is a pretty smart move.

So, hiring Goodyear as CEO may fit perfectly with Singapore’s global interests.

Sovereign Welfare Funds

Ashby Monk

SWFs are continuing to change their investment focus from foreign to domestic markets. In the face of the ongoing economic storm, Bahrain’s SWF — Mumtalakat Holding Company — has decided to continue focusing its investments in Bahrain instead of overseas. Mumtalakat had originally planned on a massive diversification overseas, but this plan has now been “slowed down”. 

This fits with the pattern seen in many other countries that sponsor SWFs. As I mentioned in a previous post, some funds are still working through the best way to manage this economic and financial crisis. One generic response appears to be an international pullback and a refocusing on struggling local economies.

SWFs are now looking more like important welfare institutions than high-flying, global investors.

SWF Growth: Confirmation

Ashby Monk

There have been a few reports now showing the rapid growth of SWFs as an asset class over the past few years. Most recently, the 2009 Preqin Sovereign Wealth Fund Review shows that assets in SWFs have increased by over 50% since 2006. According to the report, this increase stemmed from the creation of new SWFs and the re-classification of other funds (i.e. SAFE). Given that we continue to see new SWFs being created–such as Saudi’s Hassana Investment Company–there is scope to see another up year in 2009.

One interesting point: while SWF assets under management continue to climb, other large investors’ assets have been decimated. So, the relative importance of SWFs in global financial markets has grown considerably over the past few years. For example, SWFs now own something in the order of 10% of global private equity assets.  

So, while the financial crisis has redirected the media’s attention away from these funds, the crisis may have actually strengthened SWFs’ global importance relative to other investors.

Temasek’s Governance Opportunity

Ashby Monk

I was interested to catch this article describing the ‘official thinking’ behind the selection of the new CEO of Temasek.

“The Cabinet discussed the appointment of American Charles Goodyear as CEO-designate of Temasek Holdings and decided the Government should not object to a foreigner holding the post if the company’s board found him suitable and the best candidate available.”

However, the Senior Minister of State (Finance) Lim Hwee Hua told Parliament yesterday that the Board of Temasek should in fact remain in the hands of Singaporeans.

This raises an interesting question: as SWFs become increasingly important employers in the global finance industry, what place will foreigners have within these institutions? As government owned entities with a mandate to invest in the interest of the sponsoring country, too many foreigners within SWF leadership positions could get in the way of this objective. Clearly, Singapore understands this. Nevertheless, they also see the clear opportunities to be had from having an American CEO; particularly if protectionist sentiments take hold…

Introducing the HIC

Ashby Monk

Saudi Arabia has unveiled plans to set up a new public investment fund–the Hassana Investment Company–to invest pension fund assets in global stock markets. Indeed, it will manage the assets of the General Organization for Social Insurance.

The initial set-up reminds me of the Canada Pension Plan Investment Board or even the Government Pension Investment Fund in Japan rather than a typical SWF.  We’ll need to get a few more details about this institution before we can understand whether it is a SWF or not.   

In any case, setting up a new, risk seeking investment vehicle is a break with traditional Saudi conservatism; it is estimated that 85% of the Kingdom’s assets are in dollar denominated, fixed income securities.

The Ultimate Insurance Policy

Ashby Monk

The recent financial crisis has illustrated the extent to which some countries conceive of their SWFs as ‘insurers of last resort’.  Maldives President Nasheed has taken this to a new level.

In discussing his country’s future challenges from climate change, Mr. Nasheed acknowledged that contingency plans are now in place should the Maldives be completely submerged. A key part of this contingency plan apparently depends on the creation of a new SWF (sourced from tourism revenues) that will go out and buy property / land in areas with similar cultures, such as India or Sri Lanka, that could become a new home for the 300,000 islanders.

If I understand this right, Nasheed views a SWF as a way of sustaining some notion of the Maldives even if the Islands themselves disappear–SWF as a life insurance policy. Fascinating.


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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