Archive for April, 2009

CIC “On the Prowl”

Ashby Monk

The Economist Intelligence Unit has a good article on the CIC today. Wondering what the CIC’s been up to over the past year? What they’ll be doing in a year’s time? Read here.

“So what has the CIC been up to? During its apparent hibernation, when many overseas markets were too turbulent to invest in, the CIC concentrated on internal restructuring and on domestic investments.”

Sanabil al-Saudia

Ashby Monk

A new Saudi Arabian ‘state investment vehicle’ (i.e. sovereign wealth fund) will launch next week with an initial capitalization of $5.3 billion. The SWF, named Sanabil al-Saudia, will begin making investments in six months time. It will be a portfolio manager for the Public Investment Fund and will have a global mandate to invest in a broad range of asset classes.

The launch of this SWF comes on the heels of the unveiling of the Hassana Investment Company, another Saudi Arabian public invest vehicle, which will invest pension fund assets in global markets. Clearly, Saudi Arabia is looking to tap into the additional returns available in financial markets; if markets really have bottomed out, their timing couldn’t be better.

With respect to Sanabil al-Saudi, according to Secretary General of the PIF Mansour al-Maiman , external advisers will be making the investment decisions (if we are to believe press reports). This a smart way to proceed in the short-term:

First, the difficulty of setting up an effective investment vehicle should not be underestimated. The governance and competencies required necessitate outsourcing the investment function, at least in the short term.

Second, in this tumultuous market, it is better to have a scapegoat for any initial bad investments (see China Investment Corporation). By outsourcing investments, the SWF could simply replace the investors in case of poor performance, and the new SWF will retain domestic legitimacy. Conversely, if the fund started investing its own money from the outset, bad investments could result in a loss of mandate altogether.

Finally, investing internationally may spark some concern on the part of target countries; independent consultants making the investment decisions may alleviate any political concerns of recipient countries.

Singapore, Inc.

Ashby Monk

Singapore seems to have the market cornered in SWF design; countries around the world are using either of Singapore’s two SWFs as models for their own SWFs.

For example, China has drawn inspiration from both Singapore’s funds: the CIC was based in large part on the Government of Singapore Investment Corporation, and CIC 2.0 is reported to be based on Temasek. Most recently, Bahrain’s SWF–Mumtalakat–is now modelling itself on Temasek.

What is it about Singapore’s SWFs that makes them so appealing to countries considering a new SWF? I’d argue the appeal is largely based on legitimacy. This intangible asset can be rather elusive for many new SWFs. Nevertheless, Singapore’s funds appear to have it, so it is natural that other SWFs–which will require international legitimacy in order to implement their investment strategies around the world–will seek to replicate the Singaporean models.

Another reason? These two funds have facilitated the accumulation of hundreds upon hundreds of billions of dollars within a tiny, island nation. That probably has some appeal too…

Mubadala’s First Annual Report

Ashby Monk

Mubadala has just joined the list of formerly secretive SWFs. It just issued its first annual report. It joins the likes of Temasek and the Government of Singapore Investment Corporation, which issued their first reports last year. As far as I know–and as far as Andrew England of the FT knows–Mubadala is the first of all of the Middle Eastern SWFs to do so. This is thus a significant development.

According to the report, Mubadala incurred a net investment loss of Dh11.8bn. Nevertheless, the fund is set for a global expansion in 2009/10. Indeed, the act of releasing an annual report can be interpreted as a signal to countries around the world that it is ready to play (to a certain extent) by western rules and norms. This, it is likely hoped, will avoid protectionism by target countries. According to Mubadala’s Chief Executive Khaldoon al Mubarak:

“The publication of this annual report marks an important milestone in the evolution of Mubadala and reflects an ongoing commitment to transparency in relation to our investment strategy, finances and operations.”

While Mubadala did not participate in the International Working Group of SWFs (the Abu Dhabi Investment Authority represented the UAE), it is clear that the Santiago Principles have had an impact on this increasingly important SWF.

Russia’s Disappearing SWF – Part 2

Ashby Monk

I mentioned in a previous post that Russia’s poor economic conditions may result in the country’s SWFs being completely tapped out by 2012/13. It looks like I may have been wrong; the Reserve Fund will likely not survive that long.

According to Russian Finance Minister Alexei Kudrin on Wednesday, the Reserve Fund will be “practically exhausted” in 2010, and the government will have to cut spending in order to minimize their budget deficit, which is estimated at 7.4 percent this year.  

Russia has two SWFs–the Reserve Fund and the National Welfare Fund–so it has plenty of assets on hand to finance the budget deficits. At last count, the combined assets under management was over $200 billion dollars. However, given that the Reserve Fund is the larger of the two SWFs, the idea that it could be fully exhausted by next year is remarkable.

It looks like Russia will be heading back into international debt markets…

CIC 2.0 Takes Shape

Ashby Monk

Proposals to create a new Chinese SWF appear to be making progress:

“A draft proposal to establish the new firm, which is expected to have at least 50 billion yuan ($7.3 billion) of initial registered capital and to be directly led by SASAC, was recently submitted to the State Council, China’s cabinet, for approval, said the sources.”

As I mentioned in a previous post, the new SWF–which is being called CIC 2.0–will be an amalgamation of several under-performing SOEs and managed by the State Owned Assets Supervision and Administration Commission. The difference between this entity and the CIC would be its domestic focus, making it more akin to the Central Huijin Investment Company (a CIC subsidiary).

It also strikes me that CIC 2.0 will share similarities with Singapore’s Temasek, which also began with a domestic focus and a mandate to safeguard Singapore’s strategic assets through professional management. Given that CIC 1.0 was in large part based on Singapore’s GIC, it is not all that surprising that China might draw further inspiration from the island nation.

@sovereignfund

Ashby Monk

The Oxford SWF Project is diversifying into other media. In addition to the (almost) daily blog posts, we are now updating our Twitter account (@sovereignfund) on a daily basis as well. All the SWF news that’s fit to tweet! Check it out.


About

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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