Archive for August, 2010

Indonesia’s Fifteen Minutes of SWF Fame

Ashby Monk

Faisal Maliki Baskoro of the Jakarta Globe broke the big news today that Indonesia has decided not to set up a new SWF. But the bigger scoop here is the news that Indonesia was actively considering setting up a new SWF. Had anybody else heard about this? I was totally in the dark on this one.

Anyway, here’s Boskoro’s take on things:

“The government has canceled plans to create a state-owned enterprises investment fund that would have helped finance infrastructure projects. Plans for the fund, which would have used government minority stakes in partially privatized state-owned enterprises to raise money, were apparently illegal. Muhammad Said Didu, secretary at the State-Owned Enterprises Ministry, said on Tuesday that the proposed fund conflicted with a law giving the Finance Ministry control over the government’s minority stakes…”

I’m not all that surprised to hear this new fund has been scrapped. First, it’s pretty tough to do anything that’s illegal, even when you’re in the government. Second, the purported structure was quite bizarre:

“The planned investment fund, called the SOE Fund, was to rely on funds raised by state investment company Danareksa Capital, which would have been charged with managing the government’s minority shares in nine companies.”

So this would have been a sort of “sovereign debt fund”? OK. I’m still with him thus far; there are plenty of these out there. But…

“Danareksa Capital does not yet exist — it was to be established specifically for the SOE Fund project…”

Let me see if I can sum this up: The entity that was supposed raise the money for the new SWF by leveraging its stakes in nine state owned companies doesn’t exist? You’ve lost me. And apparently you’ve lost Muhammad Said Didu, Secretary at the State-Owned Enterprises Ministry:

“At first it sounded like a good idea, but it lacks a legal basis and the form it would have taken meant that the ministry would have interfered with businesses.”

Still, don’t count Indonesia out completely from the SWF club; the article also says that an SWF is “something the government has wanted since 1998.” Watch this space…

How Secretive is the Kuwait Investment Authority?

Ashby Monk

The KIA is so secretive that, apparently, the Kuwaiti parliament isn’t even aware of what it’s up to. According to an article out this morning, the country’s lawmakers had sent the SWF a proposal that asked the fund to set up a new shariah-compliant entity that would support small projects by Kuwaiti nationals. The idea was so good that…the KIA rejected it on the grounds that it was already doing this!

“The sovereign wealth fund said that it is engaged in undertakings that have been in place for a long time that make creating such entity unnecessary, the paper reports citing KIA’s response which was referred to parliament by Minister of Finance Mustafa Al Shamali.”

If it has been doing this for a “long time”, why doesn’t parliament know about it? I think this is a sign that the KIA may be a bit too secretive, even among its fellow secretive SWFs in the Middle East.

Deep Thoughts by Adrian Orr

Ashby Monk

I caught a really interesting interview with Adrian Orr, who is the CEO of the New Zealand Superannuation Fund, on NZTV. In it, Orr opines on the state of the global economy, and how the NZSF is changing its position to take advantage of this new geography of investment. Now, I have to say it, the interviewer’s grasp of the subject leaves something to be desired — i.e. he cuts off Orr a couple of times just when things are getting interesting; nonetheless, Orr manages to say some noteworthy things.

First, I was particularly interested in his position on illiquid assets. He says the fund is investing aggressively in assets that match with its long-term time horizon:

“We’ve increased exposure to property. We’ve increased exposure to some ‘distressed’ type assets globally; increased exposure to forestry; increased exposure to infrastructure, airports, tollroads…”

As I noted last week, there are lots of other SWFs that are following suit, moving more aggressively into these types of assets. And I think this is a very good thing. Investors without liabilities (or at least liabilities not coming due for decades) should be going long! So, I agree with Orr completely on this and am pleased to see the NZSF investing accordingly.

Second, I was also quite interested to hear Orr justify the existence of the Kiwi SWF on financial grounds:

“The investment proposition [of the NZSF is as follows]: the borrowing rate at which government can raise money which is one of the lowest…the lowest in an economy…. Our challenge is to earn more than that rate with a healthy profit, and we’re confident in doing that.”

I’m not a huge fan of this logic, as it reminds me a bit too much of US state and local governments issuing Pension Obligation Bonds in order to make pension contributions. Now, Orr may be right (in fact, he is almost certainly right), but if we truly believe this, then why doesn’t the NZ government just continue to issue debt for investment in the markets? (…right up until the government’s borrowing cost meets the SWF’s expected return…) The simple answer is risk. It’s a very risky strategy for governments to issue debt for the purpose of investment in financial markets.  As we all now realize, the stock market isn’t as reliable as we may have thought. In contrast to Orr, I guess I prefer to justify the existence of the NZSF as a commitment mechanism for pension saving (rather than highlighting its effectiveness as a government-run investment strategy based on an actuarial arbitrage between borrowing cost and expected return.)

Anyway, there’s a lot more interesting tidbits in the interview, which you can watch here.

*2:30pm: Updated analysis and one of Orr’s quotes .

Admin: Relocating to California? Yes and No

Ashby Monk

This post is being transmitted to you from a sunlit room in Los Gatos, California. I’ve got a cup of coffee, some interesting reading and a view of a rose garden, which means I’m basically in heaven. And, here’s the news, I’ve decided I’m not leaving…seriously…I’m staying put.

Now, if I’m honest (which I always try to be) the decision to move to the San Francisco Bay Area has actually been in the works for quite some time (basically since my wife got pregnant 11 months ago). The idea was to move home so we could have some family help with the new kiddo. Plus, after 16 years away, much of it in foreign countries, I was ready to come back to the place where I spent my youth (I was born in Canada but moved here when I was about 4).

And so, you may be asking, Ashby, what are you going to do? Are you leaving Oxford University? Actually, Oxford has just agreed to extend my contract for another year, which means I’ll be staying on as a Research Fellow and continuing on with the same stuff I have been doing (i.e. research, books, papers, blogs, conferences, etc.). How is that even possible? Well, having a dedicated research position (i.e. no teaching load) gives me the flexibility of locating where I like.  So here we are.

From the perspective of blog readers (this means you), the only change I can foresee from all this is that blog posts will go live somewhat later than they did before.

Anyway, if you ever find yourself in the Bay Area, send me a note. I’m always interested in a chat about SWFs.

Weekend Reading

Ashby Monk

I can’t believe it’s already the last weekend of August! That’s depressing. Anyway, for those of you that have managed to fit one last beach weekend into your summer plans, here’s a nice primer on managing resource rents that I think will make for some nice beach reading.

The paper is entitled “How Should Oil Exporters Spend Their Rents?” and is written by Alan Gelb and Sina Grasmann. The authors tease out some very high level prescriptions for countries looking to avoid the resource curse. They take the following as given:

“Research on the resource curse has reached a broad consensus. The likely impact of rich natural resource capital on development depends on the levels of two complementary assets: governance or institutional capital and human capital…Where these are abundant, resource wealth is likely to be a positive factor, where they are scarce, the outcomes from resource finds are likely to be poor.”

Instead, the authors focus their effort on answering the following three questions:

“First, how prudent should spending levels be over a resource boom, considering the extreme uncertainty of future oil prices? Second, how should countries consider the range of spending options, as well as policies to diversify the economy? Third, what political economy and structural factors seem to have helped some developing countries to manage resource wealth better than others?”

Spoiler alert! Here’s how they answered the last question:

“These cases suggest some common elements in success. They include a widely shared concern to preserve social and economic stability as well as to grow rapidly; a credible and stable technocracy that engages closely with leaders and elected officials; and influential non-oil export sectors conscious of the dangers posed by unrestrained boom spending out of oil income. It has also sometimes been useful to identify savings with an explicit objective, to help citizens to better understand the need for it. ”

In sum, you need technocrats that can stabilize and smooth revenues, while also convincing the general public of the need to sequester assets for the purpose of development. Hey, that doesn’t sound too hard!

SWFs and ‘Contingent Emulation’

Ashby Monk

Jeffrey Chwieroth of the London School of Economics recently sent me a paper he just wrote on SWFs. In it, he offers a really interesting take on the rapid rise of these government funds:

“Much of the literature, even that in international political economy (IPE), assumes that SWF creation is largely a functional response to the accumulation of “excess” revenue and reserves from recent commodity price booms, particularly for oil, and large and protracted current account surpluses, most notably in East Asian economies. I argue otherwise.”

And with good reason. This gap in the literature is what inspired me to write a paper on almost the same topic, albeit from an institutional perspective (see “Sovereignty in the Era of Global Capitalism: The Rise of Sovereign Wealth Funds and the Power of Finance“).

In his paper, Chwieroth suggests that the rise of SWFs is as much about “fashions” and “fads” as it is about needs or requirements. And, again, I agree with this logic (see here). In short, he argues that many of the newly created SWFs are a function of “contingent emulation“:

“I argue that rise of SWFs has been linked to their diffusion as a socially constructed appropriate institutional form or policy for particular countries to emulate. The decision of many governments to create a SWF have been shaped by a process of contingent emulation in which first this policy was constructed as appropriate for countries with given characteristics, and then when countries took on these characteristics, they followed their peers.”

I don’t know why, but this paper makes me think of Las Vegas deciding to build its own Eiffel Tower for no other reason than the original tower in Paris is quite good at attracting tourists to the city. It’s a similar principle here with the creation of SWFs in certain countries; i.e. “If it worked for them, it should work for us.”

Anyway, this paper is worth reading. While I do have a few issues with some assumptions and interpretations, I think his overall thesis about “contingent emulation” is sound (at least in certain cases). And since this is just a draft paper, he’ll likely tighten it up; it will undoubtedly feature in my reference list in the near future.

SWFs Moving Into Illiquid Assets

Ashby Monk

Natsuko Waki of Reuters had an interesting article this morning detailing the results of a forthcoming MIT research paper on SWFs. According to the authors (Pulkit Sharma and Yoohoon Jeon), SWFs will be moving aggressively into real estate. Why, you ask, would they be interested in real estate now? Here’s Natsuko’s take:

“Sovereign funds, which manage an estimated $3 trillion of assets globally, have been diversifying their portfolios into property and other sectors as their risk appetite has been recovering after suffering double-digit losses during the crisis…SWFs have a long-term investment horizon and, unlike pension funds, have no or limited liabilities. Real estate as an asset class matches the long-term investment horizon…It is also a hedge against inflation, a portfolio diversifier and, as proved by our study, provides a hedge against the wealth source changes.”

I totally agree. And I’ve been arguing for quite some time that SWFs should move more forcefully into illiquid assets. And, on cue, it looks like some are finally taking real action:

  • The CPPIB and the Future Fund announced this morning that they are putting serious money to work in Australia’s real estate sector.
  • Scott Kalb of the KIC also said, “Right now is the time to go into private markets…Risk premiums on illiquid investments are becoming attractive…If I were a bond manager I would retire today…”
  • It also came to light recently that the  CIC was looking to add distressed real estate assets to their portfolio.

This is a good thing, as it capitalizes on SWFs’ inherent competitive advantage. Let the bottom feeding begin.


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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