Archive for November, 2009

Greenland has an SWF?

Ashby Monk

I can think of one government that may be secretly hoping that global warming is a very real phenomenon: Greenland. According to an article by Karl Ritter of the AP, Greenland has been quietly making preparations for a warmer world for some time. While this includes compensating the Inuit–who hunt on the fringes of the shrinking frozen coastline–for negative climate impacts, it also includes preparations for an economic awakening and perhaps independence from Denmark:

“The retreating ice could uncover potential oil and mineral resources…The U.S. Geological Survey estimates there are more than 18 billion barrels of oil and gas beneath the Arctic waters between Greenland and Canada, and 31 billion barrels off Greenland’s east coast…Even if only a small part becomes recoverable as the Arctic sea ice retreats, it would be enough for a major boost in living standards for Greenland’s tiny population.”

Also, for a country that is covered by an ice sheet that is up to two miles thick, there is little doubt that global warming could offer new opportunities for exploration of both commodities and minerals.

With this in mind, the semi-autonomous territory decided to plan for the influx of resource wealth by setting up a SWF last year, which is modeled on Norway’s fund (by the way, which new resource funds aren’t modeled on Norway’s fund these days?). If all goes according to plan, the influx of revenue will facilitate the creation of a new, independent country in the image of the welfare states of Scandinavia.

“Finding hydrocarbons would be crucial to help Greenlanders realize their long-held dream of cutting the annual 3.4 billion kroner ($680 million) lifeline from former colonial power Denmark that currently rules out full independence.”

Fascinating.

Long Weekend Reading

Ashby Monk

It’s Thanksgiving tomorrow in the United States. Since I’m in Boston, I’m taking off until Monday.

For those of you that are also off and looking for some reading, I came across a new and interesting paper by Eduard Ponds, Roy Hoevenaars and R. Molenaar on generational accounting. The paper has implications for SWFs (and pension funds). It’s worth a read.

Be back on Monday. Enjoy your weekend!

Tour De SWF

Ashby Monk

Nobody can doubt the remarkable spectacle that is professional bike racing and, in particular, the Tour de France. In fact, as a young(er) man, I raced as an amateur around Europe and even had (unrealistic) aspirations to some day join the professional peloton. So, while the sport has had its problems with doping — and what sport hasn’t — I can totally understand the appeal for any company or sponsor who wants to get involved.

And yet, I can’t get my head around why a SWF would offer financial backing for a professional cycling team? But that is what appears to be going on in Kazakhstan:

The “sovereign wealth fund Samruk-Kazyna provided UCI with a pledge worth $22 million US per season for the next four years to back Astana.”

For those that don’t know, Astana was Lance Armstrong and Alberto Contador’s team last year. It was arguably the best team in the world. However, it was plagued with problems; at one point the team actually stopped paying salaries, which led the riders to covering up the sponsor’s logo during a premier cycling event.  Anyway, there’s been plenty of drama, and the future of the team has been in question. Apparently, this is where the Kazakh SWF comes in. It is putting up close to $100 million over four years to keep the team running.

Why? What could be the financial justification for such a move? Honestly, I’d like someone to explain this to me. Is there marketing value to be gained for the SWF from being involved in pro cycling?  Or is this a situation where the political elite have enjoyed having a Kazakh team on top of the world and are now redirecting public money for their pet projects?

Front Runners Busted

Ashby Monk

In October, David Murray, in his role as Chair of the IFSWF, noted that front running had become a real problem for SWFs:

“Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market.”

As it turns out, Murray was right to be worried. In a recent high-profile insider trading bust in the Bay Area, it was shown that one individual used inside information to front run two SWFs.

According to SF Gate’s Andrew Ross, Anil Kumar, who is a senior partner at McKinsey in Palo Alto, was arrested for allegedly sharing inside information about pending transactions involving Sunnyvale’s Advanced Micro Devices and two Abu Dhabi SWFs. Based on the information, Raj Rajaratnam made some trades in AMD options.

This illustrates that SWFs, like all large investors, are targets for this type of opportunistic behavior. However, despite Murray’s suggestions in October, I still don’t see transparency as the culprit here; insider trading is the problem. These guys (allegedly) broke the law, and they will pay the price. (It’s also interesting to note that they didn’t even profit from the front running.) So, in my view, this is not an excuse to scale back disclosure at SWFs; it’s a reason to continue cracking down on the abuse of insider information.

On a separate point, McKinsey has some damage control to do here (which it has already started with the removal of Kumar). My experience is that trust and discretion are absolutely critical in forging and maintaining relationships with SWFs. In the short-term, this leak may affect McKinsey’s ability to work with SWFs (either through their clients or as clients of their own).

Weekend Reading

Ashby Monk

Larry Catá Backer has just updated his ‘Sovereign Investing in Times of Crisis’ paper on SSRN. It’s a good paper and worth a read.

(Don’t be intimidated by the page count of 194. The paper is formatted for a law journal, which probably more than doubles its page-count as compared with a standard formatted paper.)

Enjoy your weekend.

CIC Going Green?

Ashby Monk

When I said a few weeks ago that SWFs should be investing in clean tech, I was thinking more of commodity-based SWFs. At the time, my rationale was as follows:

“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…getting in on the ground floor of clean tech would attenuate any loss of revenues associated with a technological advance that reduces our dependence on hydrocarbons.”

Well, I was right to suggest clean tech, but I was apparently wrong to leave out other types of SWFs.

The CIC has just invested over $700 million into GCL-Poly, which has 18 co-generation plants for steam and electricity, wind farms, an incineration plant, and is China’s largest polysilicon and solar wafer maker (after a large acquisition in June). The CIC will own 20% of the company and also have 49% ownership in a new joint venture to invest and develop photo-voltaic or other solar energy projects.

What’s up? Is the CIC following Norway’s lead and adding environmental investing to its remit? I don’t think so. For a company that has been spending most of its assets on commodities lately, it would only be natural to diversify into clean tech.

Still, as someone who has been to the coal mining region around Datong, I can say without reservation that it’s nice to see the CIC (and China) nurturing this new, clean technology (even if the fund’s motivation remains commercial).

2010: The return of SWFs

Ashby Monk

ING just released a new research report in which it suggests that 2010 will be a big year for SWFs. It sees assets increasing, transparency improving, and greater risk taking.


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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