Archive for July, 2010

Weekend Reading

Ashby Monk

If you’re looking for something to add to your summer reading list, I’ve come across a few SWF papers – that I unfortunately have not yet had the time to read – that look pretty interesting. Anyway, this is what I’ll be reading this weekend:

  1. Beyond Oil: Global Energy Security & Sovereign Wealth Funds” by Sven Behrendt and Joseph Helou
  2. Sovereign Wealth Funds As A Development Tool For Asean Nations: From Social Wealth To Social Responsibility” by Rumu Sarkar
  3. Attack of the Sovereign Wealth Funds: Defending the Republic from the Threat of Sovereign Wealth Funds?” by Bruce W. Bean
  4. Demystifying the Chinese Sovereign Wealth Fund” by Li Guo

Enjoy your weekend!

CIC’s 2009 Annual Report: Professionalism and Polish

Ashby Monk

I’ve just read the CIC’s 2009 Annual Report from cover to cover (so you don’t have to). And, I have to say, the professionalism and polish exhibited by this young SWF is remarkable. Page after page, the report ticks all the boxes necessary to alleviate both domestic and international concerns about its operations and objectives.

For example, there’s the fund’s new benchmark portfolio; the “four basic principles” underpinning its investment approach and strategy; the new “Core Values” driving the corporate culture; the new focus on improving governance and design; the adherence to the spirit of the Santiago Principles; the pervasive theme of professionalism and commercially oriented investing throughout; and even the photos – which seem to have a clean energy theme – paint a picture of a responsible and trustworthy organization.

Now, this may sound a bit cynical, but this report reads like the CIC paid some management consultant to write up a generic annual report of what an ideal SWF would look like. Then, the CIC took that ‘idealized annual report’ and just doctored it up a bit to match their own unique situation. I say that because it’s that good (albeit short on some of the details we’d like to see in any annual report). In a backhanded kind of way, then, that’s actually a pretty strong compliment. But (!) the question is whether this an accurate reflection of the CIC.

It’s hard to know. I suspect that the CIC has made great strides over the past few years in terms of governance and management. But, as with all annual reports, there is invariably spin and gloss. After all, this is the opportunity for the CIC to give their side of the story. But for those with detailed knowledge of this organization, some of the statements in this report may seem slightly detached from reality. For example, Lou Jiwei notes in his introduction that:

“…we are a long-term investor with a positive long-term view. While CIC, like all investors, measures and reviews its annual results, they are milestones on a longer journey.”

In theory, that should be true for the CIC as for all SWFs. However, we learned recently that Beijing has actually been quite impatient with the CIC and has pushed it into a short-term mindset. Obviously, this doesn’t come up in Jiwei’s comments.

Also, the report dedicates two pages to a case study of the CIC’s investment in the American AES Corporation. There’s one problem: the CIC announced a few weeks ago that it has put the brakes on its AES investment and will not participate in a follow-on equity investment, allowing a letter of intent to expire (though the CIC does remain a big shareholder). Again, this isn’t mentioned in the report either.

Finally, Jiwei notes in his introduction that the CIC has made a “series of direct investments in high quality companies, including investments in the infrastructure and clean and renewable energy sectors.” True. But almost nothing is said about the CIC’s commodity spending spree in 2009, which far outweighed infrastructure and clean energy investing.

Why? Because it would raise some additional protectionist fears. And, if we’re honest, this report is just an exercise in avoiding protectionism. And why would we expect anything else? The impetus behind this annual report (and those of other SWFs such as ADIA and the GIC) was the Santiago Principles, which itself was an exercise to stem protectionism and ensure free markets. In a way, then, the intended audience for this report is the policymakers who hold the keys to Western markets. As the report itself highlights, the EU and North American markets make up 65% of the SWF’s equity portfolio. So, Western protectionism is something that has to be avoided.

In any case, the annual report did have some interesting nuggets of information worth reporting:

  • The fund invested roughly $58 billion globally in 2009.
  • Return on the global investment portfolio was 11.7%.
  • Combined with Central Huijin, the SWF’s return was 12.9%.”
  • The CIC grew to nearly 250 team members by the end of 2009 (which means this latest hiring spree will take the SWF well over 300).
  • 23% of the fund’s investments are ‘strategic’ in nature; the CIC calls these investments “Direct Concentrated Holdings.”
  • 41% of the assets are internally managed, which seems like a lot.

Anyway, there you have it. If you want more, get the annual report here.

Guoxin Is Ready For Launch

Ashby Monk

I’ve been covering the painstakingly slow creation of Guoxin Asset Management – also known to some as CIC 2.0 – since March 2009 (see here, here and here). But, at long last, I’m happy to report that GAM is ready for launch (at least within the month) and will have an initial capitalization of roughly $3 billion, according to the People’s Daily.

GAM will be wholly owned by the State-owned Asset Supervision and Administration Commission of the State Council (SASAC), and it will consolidate SOEs in a bid to make them profitable:

“Once established, the new firm will take over the role of China Chengtong Group and State Development and Investment Corp, two asset management companies set up by SASAC in 2005 to take over loss-generating State-owned enterprises…the new firm will be a domestically oriented sovereign wealth fund set up by SASAC to better manage State-owned assets in the industrial sector, similar to the role of CIC that manages part of the country’s foreign exchange reserve in the financial sector.”

I can’t help but wonder if this new entity warrants the SWF label it is being given. After all, this appears to be just a new division of SASAC set up to manage the SOE consolidation process, albeit with some added gloss in the form of an SWF label and some earmarked assets. But maybe there is good reason for this. GAM will undoubtedly be looking for some private sector co-investors to help recapitalize the country’s struggling SOEs in the short to medium term. And, I would presume, private investors are more likely to hand over their hard earned money to a newly minted investment fund than they are to a Chinese government agency.

Still, that’s a bit unfair. This new “SWF” does actually resemble the Temasek of old (circa 1970s) in that it will be inheriting some unprofitable companies and have to untangle some pretty messy conglomerate structures. So in that sense, perhaps it’s right to call this a SWF. But whatever label we apply to it, GAM has a tough job ahead of it.

CIC Employees: Loyalty Above Skill?

Ashby Monk

The big news out this morning is that the CIC is launching a ‘global hiring spree’ to fill 64 new positions. The Chinese SWF appears to be getting ready for a big expansion, which we can probably assume is associated with the much publicized (and slow in coming) capital injection.

If you’re interested in applying for any of these positions, you have till August 9 to fill out an application. But don’t get your hopes up unless you’re ethnically Chinese and an upstanding member of the Chinese Communist Party. Indeed, according to a nice post on the FT’s BeyondBrics:

“…the job descriptions are only in Chinese, underlining the fact that CIC is only really interested in “highly qualified professionals” who are ethnically Chinese…Given the sensitive nature of CIC’s investments around the world new recruits are expected to be very discreet and very loyal to the Chinese government, which rules out most foreign financial professionals…The jobs on offer range from secretarial staff and human resources managers – “must be Chinese Communist Party member” – to country analyst in the international cooperation department – “must be good at keeping secrets”.

The CIC is also looking to hire a deputy director for its Disciplinary Committee and Staff Supervisory Bureau who must be:

“…a fair and upright Chinese Communist Party Member with a precise work style and strong comprehensive awareness.”

In sum, the CIC wants loyalty and discretion above skills and talent. Obviously, it’ll take all four, but it looks to me as though the former trump the latter in this case.

So, what does all this mean? Well, it means that getting a job at the CIC is more akin to getting a job in a strategically important government agency than it is to getting a job at a commercially oriented institutional investor. This then raises an obvious question: What is the CIC planning that it has its human resource function operating like it’s recruiting a diplomatic corps instead of seasoned finance professionals?

Well,  I’ve got some ideas on the subject. Still, I also think it’s fair to say that there are an awful lot of countries out there that would love to have some “inside insights” into what the CIC is planning and doing; so perhaps the CIC is guarding against these types of unwanted “intrusions”? Whatever the case, the CIC clearly has its guard up.

Dalia Advisory Limited

Ashby Monk

What is Dalia Advisory Limited, you ask? Well, according to a special report in this morning’s Telegraph, it’s apparently a “front company” for the Libyan Investment Authority in London. Why does the LIA or any legitimate institutional investor have need for a front company, you also ask? When it wants to hide its activities. And, to believe the Telegraph article, that is precisely what Libya was trying to do:

Dalia was “…established by Libyan businessmen just a week after the country’s officials were told the Lockerbie bomber Abdelbaset al-Megrahi was being considered for release…”

In other words, the Telegraph is suggesting that the establishment of Dalia (which ostensibly will come with lots of Libyan investment in the UK) is recompense (i.e. a bribe) for the release of Al-Megrahi. More details:

“Dalia was incorporated, according to Companies House records, on July 14 last year. A week earlier, at a meeting between Scottish and Libyan officials, Mr MacAskill first discussed the possibility of Megrahi being released on compassionate grounds…”

The Telegraph also cites a “Libyan business source” on Dalia:

“If Megrahi had died, they would have opened elsewhere. I don’t know where but certainly not in London.”

Now, I’m not sure this is all it is cracked up to be, as one man’s “front company” is another man’s “legitimate subsidiary”. But, if the Telegraph is right, then we’ve got some nice geopolitical intrigue going for a Monday. And, apparently, we won’t have to wait long to learn more about Dalia:

“In Washington this week, the timing of the establishment of Dalia, run by an associate of Libyan leader Colonel Muammar Gaddafi’s favourite son Saif, will come under the scrutiny of the powerful Senate Foreign Relations Committee at a wide-ranging hearing…”

Lebanese Ponder Resource Discoveries…and a SWF

Ashby Monk

There is a growing likelihood of a major gas discovery off the northern shore of Israel. And, given the expected size of the gas reserves therein, some in neighboring Lebanon are also seeing dollar signs, as some of it may be within Lebanese territorial waters.

And what do all good politicians do when natural resources are discovered in their country? They immediately think of a SWF…or at least they should. And the Lebanese are on point apparently, as Sven Behrendt writes in The Daily Star today:

“The possibility that Lebanon might benefit from exploiting massive natural resources that exist off shore in the eastern Mediterranean has provoked a debate about establishing a sovereign wealth fund (SWF) to manage the accumulated revenues.”

Premature? Maybe. After all, the resources aren’t even discovered let alone out of the ground. Still, I can’t blame them for wanting to be prepared for the discovery; it’s always better to have the infrastructure in place before the windfall rents arrive.

Anyway, I know Sven pretty well, so I emailed him this morning to get some more details on all of this. Here’s what he said:

“…The debate is really just emerging. It is a couple of parliamentarians and government having initial discussions. Nothing like a public debate…”

Still, all any public debate needs to get started is “a couple of  parliamentarians” or champions. So I find all of this encouraging for Lebanon’s future. As I’ve argued many times, a properly structured SWF can go a long way to helping emerging market countries be good stewards of their natural resource wealth.

UNCTAD on SWFs’ Importance

Ashby Monk

UNCTAD released its 2010 World Investment Report yesterday. And while this year’s Report focuses on climate change and the role of transnational corporations, it also highlights some interesting FDI data relevant to SWFs:

“FDI by private equity funds decreased by 65 per cent in terms of value, while FDI from sovereign wealth funds (SWFs) rose by 15 per cent in 2009. These funds together accounted for over one tenth of global FDI flows, up from less than 7 per cent in 2000 but down from 22 per cent in the peak year of 2007. FDI by private equity funds was affected both by the drop in their fund-raising and by the collapse of the leveraged buyout market…Funding for SWFs also suffered in 2009, due to declines in commodity prices and trade surpluses. Yet their FDI activity did not decline, reflecting the relatively high growth of the emerging economies that own these funds. New investments were redirected towards the primary sector and industries less vulnerable to financial developments as well as developing regions.”

Anyway, if you don’t have the 95 bucks to buy the report, there is a free overview. To get it, click below:


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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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