Archive for October, 2009

Weekend Reading

Ashby Monk

Roland Beck and Michael Fidora have a new paper out in the European Business Organization Law Review entitled, “Sovereign Wealth Funds – Before and Since the Crisis”. The paper provides a “reassessment of the growth prospects of sovereign wealth funds.”

The authors say that, despite the lower estimates for assets under management, “there are no grounds to believe that sovereign wealth funds will become less important players in global financial markets over the future, as the structural drivers behind the accumulation of large foreign assets in emerging economies remain in place. Hence, sovereign wealth funds are likely to continue growing and increase their relative importance in global financial markets. Therefore, it remains imperative to resume the efforts – that seem to be partly halted by the current economic and financial crisis – to build a global governance framework for sovereign wealth funds.”

Commodity SWFs Should Invest in Cleantech

Ashby Monk

Over the past few years, I’ve been fascinated with the cleantech venture capital wave that has gripped my home town of San Francisco. Investment in cleantech has gone from around $500 million in 2001 to well over $8 billion in 2008 (despite the credit crisis). Whether it is the drive to build a more efficient server or a battery powered car that does 0-60 in under 4 seconds, cleantech appears to be the “new, new, new thing” in Silicon Valley (to borrow words from Michael Lewis).

As such, I think cleantech would be a great investment for commodity based SWFs. Since sponsors of such funds typically rely on resources that will lose-out if the cleantech revolution succeeds, these investments would offer a very nice hedge over a long-term time horizon (~30 years). Indeed, getting in on the ground floor of cleantech would attenuate any loss of revenues associated with a technological advance that reduces our dependence on hydrocarbons.

It appears one SWF has finally gotten the message. I was reading this article this morning about the growing momentum in cleantech and came across the following:

“A variety of investors continue to support the cleantech sector. Of the top 10 venture capital-led deals in Q3 09, four included private equity investors, three included corporate investors, and one included a sovereign wealth fund.”

Watch this space…

CIC: Double Bottom Line Investor?

Ashby Monk

How many resource investments can one SWF make? The CIC continues to astound by funneling huge (inordinate?) sums of money into energy and commodity investments around the world. Of the $40 billion it has already invested in 2009, I’d wager that upwards of $30 billion have been in resources. In September alone it spent nearly $4 billion. To me, this doesn’t look like the type of diversified investment approach that one would expect from a $300 billion investor. What’s going on?

You’d be forgiven for assuming the CIC was investing in the “national interest.” Indeed, the CIC’s newfound taste for commodities would clearly jive with China’s voracious appetite for such things. However, the CIC is working hard to dismiss such claims:

“I don’t care about how many tons of oil to ship home, I care about whether stocks are worth more money,” says Lou Jiwei.

So why resources? Apparently, the CIC sees an asset bubble forming and wants real assets to hedge against inflation. This is probably wise, especially since most of China’s forex reserves are locked up in US Treasuries. There are lots of us that are currently worrying about inflationary pressures.

Nonetheless, it strikes me that we might be looking at a SWF that is investing with a “double bottom line.” Like other DBL investors, the focus remains “profit.” But other factors are considered, such as urban development or green initiatives. In the case of the CIC, it seems totally reasonable to invest in resources from a purely commercial perspective. But if it serves the national interest, so much the better!

A New Governance of Global Finance?

Ashby Monk

Katharina Pistor recently published a paper in the European Business Organization Law Review entitled, “Sovereign Wealth Funds, Banks and Governments in the Global Crisis: Towards a New Governance of Global Finance?”

It’s an interesting article. She argues that any financial crisis is ultimately the result of a governance failure. In turn, after a crisis, governments will seek to fill this governance deficit, which means that the fix is always backwards looking instead of forwards “thereby inadvertently sowing the seeds for the next governance failure”.

So, you might ask, what does the current governance framework look like? Pistor draws the following Figure to give you a taste for the growing complexity:


Insider Trading

Ashby Monk

Governments can move markets; this much is obvious. With the rise of SWFs, governments can also, in theory, profit from these movements. Such are the allegations currently being made against the Australian Future Fund over its August sale of Telstra, as the government announced its intention to split the company up less than a month later.

According to a Bloomberg article:

“The Australian Securities & Investments Commission will investigate whether the Future Fund was “tipped off” on the proposed separation of the country’s former phone monopoly.”

The Future Fund is already mounting its defense, noting that it had announced the intention to sell Telstra shares a long-time ago. In addition, the Fund claims to have had no such “tip-off”:

“We have already made absolutely clear publicly that the Board and Agency had no access to non-public price sensitive information,” said Will Hetherton, a spokesman for the Future Fund. “We will be happy to confirm this fact in response to any request from ASIC.”

Given the high standards of governance at the Future Fund, and its clear separation from political influence, I’m of the mind that it is innocent. However, this investigation flags up an interesting issue.

If a quick phone call from a politician to a SWF manager can mean the difference between hundreds of millions of profit or hundreds of millions of losses, there will undoubtedly be a temptation to make the call; especially if the gains will contribute to the country’s economic and social security (e.g. more secure pensions) or free up space in the budget for other spending. In countries with less robust governance and legal rules than Australia, will the temptation be too much?

Weekend Reading

Ashby Monk

Brendan J. Reed published a paper earlier this year in the Virginia Law and Business review entitled, “Sovereign Wealth funds: The New Barbarians at the Gate? An Analysis of the Legal and Business Implications of their Ascendancy.”

While the author thinks SWFs are not a threat to any given country’s economic or national security, he presents what he feels is the appropriate way to regulate them. In the end, he concludes that, if action must be taken, the FINSA regulations are the best place to “tweak the treatment of SWFs in the United States.”

‘Dodging Bullets’: SWFs and the Crisis

Ashby Monk

I read with interest David Murray’s comment this morning about the Future Fund’s performance during financial crisis:

“…we dodged a bullet during the crisis partly because we had to take time to get established…Our original capital was intact through the crisis and in the latest quarter our returns returned quite significantly more in the positive turn in the markets.”

The Future Fund was brand new when the financial crisis hit. Established in 2006, they didn’t have much time to get their bearings before the bottom fell out of the market. The same can also be said for the China Investment Corporation. Established in 2007, early financial and political woes kept the CIC almost entirely out of the market in 2008. The result: its assets have grown to nearly $300 billion.

Today, both the FF and the CIC are well placed to meet their objectives over the long-term. In fact, I can’t help but wonder if the financial crisis has actually strengthened the hand of these two funds. On the one hand, they have plenty of capital to invest in discounted and distressed assets. As long-term investors, they are well placed to take advantage of such deals. On the other hand, the international political concerns that marked 2007 have largely dissipated. This is undoubtedly due in part to the Santiago Principles, but I’d also argue that the pressing need for capital in the west during the crisis helped on this front as well.

So, these funds dodged a bullet, as Murray suggests. But it was more than that. The crisis seemingly created a political and economic environment in which these funds could thrive.


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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