Archive for October, 2010

Australia’s Future Fund: The Self Aware SWF

Ashby Monk

A serious case of jet lag woke me up this morning at an uncivilized hour. (I’m in Kuala Lumpur for a conference). So, since it was still dark out, I decided to try to be productive by making my way through the Australian Future Fund’s latest annual report. And, I have to say, it’s impressive. Not only does it offer stunning detail on the operations of this fund, but it also has a few surprises, such as a GAPP implementation report on page 119.

However, I was particularly struck by the Future Fund’s ongoing commitment to improving its organization. So, despite the fact that the fund was set up according to “best practice” principles of governance in 2006, it has decided to use the lessons from the recent financial crisis to further refine its operations:

“The Board has initiated a review of governance practices and arrangements within the organisation, including a comparison of key governance elements to those of other leading global funds. This reflects the obligation on the Board to have regard to international best practice for institutional investment and the Board’s own view that good governance protects and creates investment value. The outcome of this review will help the Board ensure the organisation’s time, resources and skills are optimally applied to the achievement of the Investment Mandate. Ultimately this will contribute to the achievement of performance goals and other key targets over the medium term.”

That’s music to my ears…

Weekend Reading

Ashby Monk

I’ll be on the road next week attending the Institutional Investor Roundtable in Kuala Lumpur. It should be a lot of fun. If you’re attending, don’t hesitate to introduce yourself and say hello.

Depending on the conference ground rules, I do hope to share some of my thoughts and reactions from the proceedings on this blog and potentially even do some live tweeting during the conference. (…I’ll have to see if I can muster the strength to be “that guy” typing away on his phone while somebody is trying to present. Actually, now that I think about it, I doubt I’ll be doing any live tweeting, but I will do some updates at the breaks…)

Anyway, I did manage to scrounge up a few interesting things for the weekend:

  • First, given that I’m off trotting the globe, I thought I’d share a wonderful map (…I told you, I love maps…) that the NBIM put together. It highlights their global investments, and it’s cool.
  • Second, Trond Døskeland has (what looks to be) a very interesting paper entitled, “Investment Strategy of Sovereign Wealth Funds.” I’d really love to read it and tell you all about it, but for some darn reason the Oxford School of Geography and the Environment doesn’t have access to the journal, Energy, Natural Resources, and Environmental Economics. How is that even possible? Anyway, maybe some kind reader out there will send me a PDF?
  • Finally, Jory Surendranath, Mark J. Perry and Thomas A. Hemphill have (what looks to be) another interesting paper entitled, “The role of sovereign wealth funds in global financial intermediation.” This one is in the Thunderbird International Business Review, which (and this one is a bit more understandable) our department also doesn’t subscribe to. Once again, if you have a copy, send it along.

Enjoy your weekend!

On Infrastructure: Do It Directly…If You Can

Ashby Monk

I saw yesterday that the FT had an article on Global Vía Infrastructuras (GVI), which is a struggling infrastructure investor that needs to raise some capital:

“The infrastructure subsidiary of FCC, the Spanish construction and services group, has begun talks with specialist investors about the sale of a stake in the company… it is understood the Madrid-based group, which manages €3bn ($4.2bn) worth of toll roads, ports, airports, railways and hospitals mainly in Europe and the Americas, is looking to sell a large minority stake to a pension fund, insurance group, sovereign wealth fund or investment bank… Juan Béjar, the chief executive, said the company was looking to sell about €500m worth of equity, between 20 and 40 per cent of the company.”

The question I have is why an SWF would invest in a private asset manager that invests in infrastructure rather than just investing in the infrastructure directly?

The obvious answer is that the SWF doesn’t have the necessary governance or competency to do these deals. Therefore, they have to outsource it to these private sector guys. Fair enough; I totally get that. But (!) a SWF investing in a private asset manager that, in turn, invests in infrastructure just seems off to me. Feel free to disabuse me of this position, but won’t the SWF be giving up its main competitive advantages by doing this (i.e. scale and time horizon)?

Again, my view is that the scale and time horizon of SWFs makes them (in theory) world beaters in this specific asset class. Who can bring this amount of money over this time horizon to a single infrastructure project? I’m pretty sure the answer to that question is ‘nobody’. I don’t think…and I could be wrong here…that the private sector asset managers can compete on the same level; the private funds are too small and the duration of the infrastructure assets too long (and the demands of the LPs too myopic).

So, what to do? Well, perhaps more SWFs should skip the circuitous route into infrastructure (via private managers) and, instead, look to develop the skills and governance needed to do this directly. Of all the asset classes out there, I think it’s worth it for SWFs to consider ‘in-sourcing’ infrastructure. Now, I’ll be the first and the last to say this, it has to be done right, as there are plenty of opportunities to screw up…and big…which means the fund has to be extremely proactive about design, governance and skills.

This last point actually gives me an opportunity to plug some of my new colleagues at Stanford University. Wait, what? Stanford? Yes, I guess I should first mention that I’ve accepted a position at Stanford University as a Visiting Scholar in their Collaboratory for Research on Global Projects. Not to worry, I’m still on the faculty at Oxford and all the Oxford SWF Project stuff will continue on as if nothing has changed. However, I will be doing a bit of work (i.e., I’ll be having deep thoughts with other academics) at Stanford about how large public investors might set up their internal governance systems to facilitate direct investing in infrastructure. This type of big picture thinking with real world applications is pretty much exactly what the CRGP is all about. Here’s a blurb about my new home-away-from-home:

“The aim of CRGP’s research program is to enhance understanding of legal, social, political, financial, and institutional processes that interact in complex ways to affect global project outcomes.”

Cool, right!?!? Yes, I’m a big nerd, but these guys are really doing some interesting stuff. For example, they are hosting a one-day conference in December that drills down into project level due-diligence and analysis that will bring academics together with large, public investors. I’ll be attending purely as a spectator.

Anyway, all this is to say the following: I feel as though SWFs have a certain strategic advantage in infrastructure investing, but, in order to leverage this, they really need to be investing directly. In turn, this requires upgrading the organization for a complex and risky endeavor. In my view, it’ll be worth it over the long-term…

The SWF Model? Not Likely…

Ashby Monk

Greg Bright has quite an interesting article on top1000funds.com. In it, he suggests that the ‘SWF model’ may be the new ‘endowment model’ (aka Swensen model), which is another way of saying that a variety of different investor classes should think about adopting some of the investment strategies of SWFs:

“Some sort of shape is starting to take place, post-global crisis, as to how the biggest, longest-term investors are spending their money. If the endowment model was the one to follow for the past 20 years, the sovereign wealth fund model may be the one to follow for the next.”

This is a hard argument to swallow. Last I checked, the economists (such as these guys, this groupthose guys, and these two) have been dragging SWFs over the coals for their investment strategies. So, it’s a tad surprising to see someone saying that these funds should now — in the name of achieving financial outperformance — be copied.

Nonetheless, I’ve said repeatedly that I think SWFs have strategic advantages over other investors. So, I’m one of those (few?) who would potentially be amenable to such an argument. So, Mr. Bright, let’s hear it:

“What the big endowments did was invest directly, with their own teams of specialists and professionals, in areas where they had particular expertise, such as private equity and real estate. They then laid off the other parts of their portfolio in much the same way as big pension funds do anywhere, with a mix of growth and defensive allocations.”

I’m a big fan of direct investing in areas where you have a strategic advantage; it’s classic management theory. (You need excellent governance to do this in-house, but it’s doable.) However, that’s still the ‘endowment model’; we need to learn about the ‘SWF model’:

“What [SWFs] have in common, though, is a single shareholder – a government – with a legislated genuine long-term aim for the fund’s investments…a common element is the desire to take significantly large stakes in companies or other assets which reflect a long-term theme. SWFs have, for instance, waded into hostile takeover battles for resource companies. They have invested directly in big infrastructure projects. And they have backed IPOs of established businesses, which are targeting future growth areas…SWFs have the added advantages of fire-power to get a seat at any table and the inhouse resources to analyse and negotiate their positions.”

And what does this imply to Mr. Bright?

…a common element is the desire to take significantly large stakes in companies or other assets which reflect a long-term theme…all investors can identify themes and direct their asset allocation accordingly.”

It’s an interesting argument, but the punch line wasn’t quite as exciting as the buildup (…which reminds me of the hours of my life I wasted watching the show Lost…how I want those hours back). Anyway, Mr. Bright isn’t wrong, but I still don’t think the SWF model will ever be as popular as the endowment model.

The reason SWFs are able to do what they do is because they are unique…as in, other investors are dissimilar in form and function. SWFs have a single shareholder (which is the government); they have no liabilities beyond this sponsoring government; they have an inter-generational time horizon; they have enormous scale; and, in some cases, they have certainty of cash flows for decades. Private investors have a hard time ticking any of those boxes. So, what’s appropriate for SWFs most likely is not appropriate for other funds.

Moreover, these “themes” that SWFs are focusing on (which seem to be the crux of the ‘SWF model’) are, in some instances, more about national strategic priorities than about returns. Granted, funds such as the CIC argue that their interest in commodities and resources have nothing to do with China’s broader priorities, but other funds are more forthcoming in their “thematic” objectives. For example, Mubadala is as interested in creating jobs in Abu Dhabi as it is in returns when it invests. The same goes for Qatar. Other non-governmental investors (with liabilities) have no interest in these sorts of “themes” because they have no desire (or ability) to invest for the generic benefit of the country they inhabit. They need to show their (many) shareholders measurable returns (and in the short-term). In addition, focusing on themes and taking big stakes in firms goes against the typical focus private investors have on diversification.

Anyway, I’m grateful to Mr. Bright for inspiring some fun thought this morning. I promise to think more about his idea of ‘what investors can learn from SWFs’. It’s worth doing.


Managing Wealth In Frontier Economies

Ashby Monk

What happens when “the most impoverished region in one of the world’s poorest countries” wakes up one morning and figures out, “We’re rich!?” Well, Norimitsu Onishi’s article in the NYT today on Papua New Guinea offers some remarkable insights. Using a series of compelling stories, Onishi highlights the immense societal, cultural, political and economic challenges faced by frontier economies that do in fact discover they are resource rich. Have a gander at these remarkable excerpts.

On the difficult economic geography:

“Constant tribal wars over land, women and pigs — the last being prized measures of wealth, used to pay for dowries and settle disputes — have grown deadlier in the past decade with the easy availability of high-powered rifles smuggled in from Indonesia, just to the west, which are exchanged for the marijuana grown here…”

And on the temptations associated with this sudden influx of wealth:

“…A short drive away, Hamon Matipe, the septuagenarian chief of Kili, confirmed that he had received that sum [$120,000] four months earlier. In details corroborated by the local authorities, Mr. Matipe explained that the provincial government had paid him for village land alongside the Southern Highlands’ one major road, where the government planned to build a police barracks. … Mr. Matipe said he had given most of the money to his 10 wives. But he had used about $20,000 to buy 48 pigs, which he used as a dowry to obtain a 15-year-old bride from a faraway village, paying well above the going rate of 30 pigs. He and some 30 village men then celebrated by buying 15 cases of beer, costing about $800. All the money is now gone,” Mr. Matipe said. ‘But I’m very happy about the company, ExxonMobil. Before, I had nothing. But because of the money, I was able to buy pigs and get married again.'”

What a story! Basically, the Chief – ostensibly the wise elder of the local village — received $120,000 for his land, which he immediately spent on women and alcohol. That may be a crude simplification of the story, but how else would you interpret this? Even the pigs he purchased were intended as a dowry for his 11th (!) wife.

Now, to be fair, it’s ridiculous for any American (and I do hold an American passport) to comment on the consumption habits of other countries; the amount of credit card debt we’ve amassed in this country is both astounding and depressing. (…and in reading this story, I can’t help but think of a similar story from my undergraduate days in which a lump sum was blown on beer and oreos…)

Still, wouldn’t it be wonderful to come up with some sort of governing institutions that can help frontier economies better manage their resource windfalls? No doubt the Chief would have liked to make his entire village better off for generations to come?

And, since you’re reading this story on this blog, you’ve no doubt guessed that I’m thinking about a SWF. But, surprise, PNG is well ahead of me on this. In fact, the country has been actively considering a series of new SWFs, which it will direct the revenues from its stunningly large LNG project, which will come on line in 2014. (This project could bring as much as $50 billion into PNG, which translates into roughly $10,000 per person in a country with a GDP per capita of just over $2,000. That’s a lot). Let’s turn back to the NYT article again:

“While conceding the danger of social disruptions, Papua New Guinea officials are adamant that the windfall will be used for development and not siphoned off by the well connected. Mr. O’Neill, the finance minister, said the government planned to channel the revenue into three sovereign wealth funds that would be overseen by a board of advisers, including foreigners, adding that the government would also be held accountable by the World Bank and other creditors.”

Now, PNG has the dubious distinction of having been the sponsor of a failed SWF: the Mineral Resource Stabilisation Fund, which was shut down in 1999 due to excess draw-downs. However, I think this failure offers PNG a leg up on other frontier economies in a similar position, as it knows all too well the pitfalls of poorly designed and governed SWFs.

As such, PNG has been working closely with Australia in order to set up the appropriate fiscal and macro-economic infrastructure in order to ensure that the LNG wealth coming on line helps PNG advance its development (rather than ushering the country into the resource curse). And this will include a SWF. I also think they should be paying attention to Alaska, where the SWF connects the oil wealth directly to the people through a yearly dividend. And yet, centralized asset management and decision-making by bonafied experts ensures that the assets will be around for generations to come. That’s a model I can get behind!

QIA: The Emirate’s Intriguing Wealth Fund

Ashby Monk

The FT has a fantastic interview with the Emir of Qatar, Sheikh Hamad bin Khalifa al-Thani, in which he talks at length about the Emirate’s objectives and the role of the Qatar Investment Authority therein. If you read this blog, you’re aware that Qatar has perhaps the most active SWF in the world today. Moreover, it also happens to be one of the more strategically oriented SWFs. So this is a unique opportunity to gain some insight into the operations of one of the more intriguing SWFs in the world. Anyway, I encourage you to read the entire interview, but here are the bits of particular relevance:

On the rationale for setting up the QIA in 2005:

“So now we plan to save money for the future of our generations, and to make sure that we secure them, as I mentioned to you, for education, for health, culture, museums, sports; to make sure that we have money for the future and that the standard of living can continue as it is. We are investing everywhere. Even your Harrods, we took it…”

On how the SWF is helping the Emirate:

“We are trying to attract companies from outside to invest here in Qatar, whether with the Qatar Investment Authority [the sovereign wealth fund] or with the private sector.”

On the role of the Emir in the SWF’s investment decision-making:

If I have an idea, yes, I tell them I am thinking about this. But they are not obliged to do what I want. The main thing is that they have to do our strategy, how to find the best things which would help the future of our generation. This is clear. If I want anything for myself this is different. It might be sort of gambling; if I lose, I lose myself. But this money (the investment funds money) no, this should be for the generations.”

On how he comes up with investment ideas for the fund:

“For me it depends what comes into my mind, what I see on the television or in the news; because this is how humans think. Of course, I would like a good thing which would help our coming generations.”

On the geopolitics of SWF investments (in the UK):

No, because I’m sure in Britain they want us to invest instead of others. We are a small country, we are a peaceful country; we will not bother Britain at all.”

In short, the Emir appears to take an active interest in the activities of the SWF, offering investment ideas and weighing in on certain investment decisions. However, he is taking a very sophisticated position, noting that the fund must fulfill its objectives first and is in no way obliged to take his advice. (Though you’d probably have a hard time saying ‘no’ to ‘advice’ on investments from the Emir.)

And I also think the Emir is correct in his assessment of the geopolitics of the QIA’s strategic investments. Like I noted with respect to Mubadala, this SWF (while large and very active) is sponsored by a country perceived in the West to be friendly and unthreatening (what the Emir himself calls ‘small and peaceful’).  As such, this fund will likely be afforded a bit more leeway on GAPP 19 than, say, the China Investment Corporation (which matches the QIA in terms of the volume of strategic transactions).

Admin: Five Hundred! And Counting?

Ashby Monk

I noticed earlier this week that the post counter in my blog publishing software was ticking towards a rather important milestone: …497, 498, 499… and, with this post, I’ve officially attained it: 500. And so I have a question: Do you congratulate or scold yourself for writing 500 blog posts on SWFs?

It’s hard to say. There’s no immediately apparent academic payoff to blogging daily. In fact, some would say (and some have told me) that blogging takes away from more productive pursuits (such as the actual research I’m paid to do). That’s something any aspiring academic should take seriously. After all, the only chips in the academic game are peer reviewed and published research papers and books. The concept that academics must publish or perish is alive and doing quite well thank you. (If you thought teaching was important for a budding professor, think again. Teaching is like breathing, you eventually have to do it in order to keep from perishing, but nobody’s going to give you credit for it…or the fact that you may do it well, which is unfortunate). There’s probably a reason why all the academic bloggers I can think of already have tenure and the one I can conjure that was a remarkably skilled blogger long before his tenure committee’s decision…didn’t get it (at least at first).

But, you know what, while I would have agreed two years ago that ‘time blogging is time that might have been better spent’, I think I’d probably disagree today. I see now some clear benefits from the process that underpins blogging, and I also increasingly view blogging and micro-blogging as an important part of an ‘idea production chain’. For example, the blog forces me to sit down every single day and get caught up on what’s happening in the real world by reading the latest news and reports. In understanding these current events, I inevitably come up with ideas for the blog. Then, while writing blog posts, I often come up with (what I feel are) interesting ideas for my academic work. The circle then comes back around, as the same tools that helped generate the initial idea offer a ready-made network for distribution of the refined idea. So, I post my academic work on the blog and on the Twitter feed and, sometimes, I actually find myself reading about my own research in the same papers and magazines that helped to spark the initial ideas in the first place (e.g. and i.e.). The idea loop is complete.

Obviously, the downside to all of this is that a blog is a very public forum in which to “work out ideas” (which is another way of saying, “be wrong”). But, hey, that’s the point, right? After all, what you are reading is just a blog. Frankly, I’m allowed to be wrong from time to time in this medium. Feel free to hold me to anything I write in a journal article, but before you think a blog post from two years ago represents my current state of mind…better check again.

Anyway, all this is to say (…and probably to convince myself…) that the 500 posts were worth my time. The question is, then, will I keep doing this for another 500 posts? I can’t say. I’ve got the funding to get me close to 750, but after that I don’t know. I guess I’ll have to revisit this post in a year’s time and decide…was I right about the benefits of blogging or, perhaps just as likely, was I wrong.

In the meantime, thanks for reading!


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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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