Ranking the World’s SWFs: Another Go

Ashby Monk

It appears that Institutional Investor has thrown its hat in the “SWF Ranking” ring, joining the likes of Monitor, State Street, Pensions & Investments, International Financial Services London, RGE, SWF Institute among others. It’s a tough game, as the transparency (or lack thereof) of these funds necessitates: 1) quite a bit of sleuthing; 2) some large assumptions; and 3) a dash of guesswork.

Encouragingly, it looks as though II has gotten the right mix.  Not surprisingly, the Abu Dhabi Investment Authority tops the assets under management ranking, weighing in at $627 billion. Up next is Norway’s SWF with $461.5 billion. And SAMA, CIC and Hong Kong’s Monetary Authority then round out the top five.

Now, I’m a bit surprised by some of the funds the II folks have decided to include. For example, most other rankings of this sort don’t include SAMA or the HKMA (even though they probably should due to their risk appetites). And I was particularly perplexed to see the Caisse de dépôt et placement du Québec in there, as this (to my knowledge at least) is really just a pooled fund for public pension plans in Quebec. So, while it is quite large and governmental, it also has liabilities to its “depositors”, which means it’s not a SWF. (See here for the ranking’s methodology.)

Anyway, the SWF report is still quite interesting to explore. I particularly enjoyed clicking through the pictures of the various people representing the top ten funds (although I am curious why ADIA is the only SWF in the top 10 without a face?).

And Loch Adamson’s article, entitled “Sovereign Wealth Funds Are Going Mainstream”, ties into the new ranking nicely, offering some insights into the changes and realizations that have taken place within many SWFs over the past few years:

“…sovereign wealth funds now face the problem that without clear governance guidelines defining how their funds can be deployed, their complex liabilities may be hard, if not impossible, to model and manage. That heightened vulnerability has made some investment teams more cautious.”

“In Norway the Finance Ministry demanded that Norges Bank Investment Management, the central bank arm that oversees Norway’s giant pension fund, submit to an external review of its active- management program. Other sovereign investors have kept internal debates about investment strategy private, but there is little doubt among asset managers who work closely with sovereign investors that such debates are raging widely.”

“Beyond the urgent need to address portfolio strategy, several sovereign wealth fund investors have faced political demands on their capital.”

“…some — like the Kuwait Investment Authority, Ireland’s National Pensions Reserve Fund and Russia’s two funds, the Reserve and National Wealth funds — have been raided by their own treasuries to bail out troubled banks and companies in their domestic economies.

“The greatest risk to sovereign wealth funds that I see is political risk, not the risk of broader macroeconomic uncertainty,” says Judith Posnikoff, a co- founder of Irvine, California–based fund-of-hedge-funds firm Pacific Alternative Asset Management Co., which works with a number of sovereign funds. “If the global economic recovery continues to slow, certain regions of the world may see a need to raid those funds.”

In brief, the biggest lessons coming out of this article are that:

  1. SWFs need to improve (or have been working hard to improve) their internal governance practices in order to better manage assets in-house and, more specifically, better understand their risk profile (…which often means moving from an asset class approach to a factor based approach…); and
  2. SWFs will need to develop protocols to ensure that internal staff have the freedom (especially from political haranguing) to invest to achieve financial (and not political) objectives.

Agree to agree.

2 Responses to “Ranking the World’s SWFs: Another Go”

  1. 1 Rien Huizer September 17, 2010 at 7:37 am

    @1: of course, fund managers should use proper tools and techniques. Especially SWFs from commodity-based countries should keep an eye of the valuation dynamics of all the tradeables (incl unproduced but known reserves of the commodities in question) Hence, for an ADIA with very large reserves, portfolio strategies should definitely include a factor dimension. But of course they would know that.
    @2: If a SWF is owned by a sovereign, that sovereign, does not “raid”. They simply change their mind, as sovereigns are entitled to do. It would be more complicated if those sovereigns would act against their own laws. But that is probably not the case. Partially liquidating a wholly-owned SWF is not the same as raiding a pendion fund with defined beneficiaries..

  2. 2 Ashby Monk September 17, 2010 at 12:56 pm

    Hey Rien, your point 2 is well taken. I guess I was more thinking about the experience of Ireland’s NPRF than Russia’s or Kuwait’s funds. You’re totally correct that this is basically what these funds are for! Have a nice weekend…

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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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