Archive for December, 2010

Out of Office: Oxford SWF Project

Ashby Monk

I’m going to (try to) take a real vacation until the end of the new year. No SWF reading. No SWF writing. No SWFs at all. See you in 2011!

Top Ten Tweets

Ashby Monk

Here they are: your top news items from the past week’s @sovereignfund feed:

  1. Sorry, CIC 2.0 isn’t really a SWF. Big let down, I know. Here is my post from months ago.
  2. KIC and Mubadala alone at top in terms of cooperation. These two have joint-investments with SWFs all over the place!
  3. It kind of boggles the mind that Norway’s GPF-G is just now getting into real estate.
  4. Before QIA makes this investment it may want to ring up Temasek. #duediligence!
  5. GIC is interested in distressed shopping malls in Australia. Who wouldn’t be?
  6. Dubai World’s new Chairman — Sheik Ahmed bin Saeed Al Maktoum — is looking to shape things up. #toughjob
  7. Future Fund buys into my least favorite London airport.
  8. Temasek is banking on…or rather in…Vietnam.
  9. China-Africa Development Fund buys into South African platinum sector.
  10. SWF word association: I say, London Real Estate. You say…?

India’s Strategic Petroleum Reserve…Fund

Ashby Monk

Here we go again. India’s Financial Express has a story that reads as if it was filed last summer and the Editor just got around to hitting “publish”:

“The government is planning to set up a sovereign wealth fund (SWF) to acquire oil and gas blocks abroad…The National Manufacturing Competitiveness Council is examining the feasibility of setting up an SWF to acquire raw materials and assets from abroad not only in the energy industry but across all sectors. We are awaiting their recommendations,” said Vivek Kumar, joint secretary, petroleum ministry.

Recall that the idea for an Indian SWF has been popping up for over a year but was (ostensibly) “abandoned” in August. Well, according to this article, the key drivers underpinning this now resuscitated SWF will be to:

  • joint-bid on commodity assets with countries like China;
  • engage in oil diplomacy with resource rich countries; and
  • collaborate with the private sector to gain access to resource technologies.

It’s perhaps understandable that this debate has been rekindled given that these comments were made at a roundtable on “overseas energy acquisition to ensure India’s energy security”. And given the spate of investments by the Chinese funds in commodities and minerals around the world, I can understand why other countries would be interested in getting involved. After all, Japan recently said it was considering a new SWF to make investments in the global resource industry. Perhaps these nation states are coming to the realization that they cannot rely on their private sectors to ensure energy security and independence?

After all, there must be a good reason why the US government has the strategic petroleum reserve (SPR), which is the single largest emergency supply of oil in the world and is valued at…wait for it…almost $100 billion! The SPR was set up in 1975 after the oil crisis disrupted supplies to the United States. Should we perceive this US pool of real assets accumulated for a crisis any differently than a pool of financial assets for the same purpose? I recognize the SPR isn’t a SWF; it’s kinda the opposite actually in that it’s investing financial capital in stuff you put in the ground. But, ultimately, the US government has made the decision to stockpile assets for a rainy day (i.e. future oil crisis). Other governments should probably be allowed to do the same, no? (I recognize that might mean stepping outside a couple of the guidelines in the Santiago Principles, but I’m nonetheless interested in thinking this through.) Maybe we should just call India’s new SWF the Strategic Petroleum Reserve Fund and let them get on with it? Cogent thinking on this topic welcome!

China ‘Friend Requests’ Africa

Ashby Monk

The always interesting Jamil Anderlini strikes again this morning with a story about China’s attempt to win “friends” in Africa. Drawing on observations from the Ceremony for China-Africa Friendship Awards, he suggests that “China obviously thinks it has an image problem in Africa.” The topic is all the more pertinent given that this week saw a whopping billion dollar investment by a Chinese consortium, which includes the China-Africa Development Fund, in a South African platinum explorer.

Anyway, the Anderlini article reminded me of a line out of a fascinating new paper I just read by Martyn Davies of the OECD entitled ‘How China is Influencing Africa’s Development‘:

“The Chinese Government’s brazen corporatist approach to engaging Africa is being actively downplayed through political rhetoric that appeals to a political solidarity that China has with Africa as well as the ramping up of aid to African states.”

In other words, Anderlini and Davies agree: China is trying hard to change its image and make nice in Africa. And it looks to me as if the jury is still out on this topic. Here’s how Davies concludes his paper (which, by the way, is well worth your time to read):

“I do not believe that we as Africans have even begun to comprehend the long-term strategic implications of China’s growing commercial presence in Africa. A shift in Africa’s economic relations is occurring – away from traditional economies toward the east and  China. This force has not been created by the current crisis that is inflicting western economies, but it has definitely accelerated it. The developmental impact of this shift in Africa will begin to become clearer as the depth of China’s commercial penetration becomes greater.”

So, basically, Davies says, ‘Watch this space!’ At least there’s plenty to watch:

New Mexico Gets Governance

Ashby Monk

Given that I’ve been at this blog for over two years, I find it a bit odd that I’ve never found a reason to write about New Mexico’s SWF. I’ve mentioned it in passing – such as noting that it’s the third oldest in the world or that it is one of five SWFs sponsored by American states – but I’ve never written a post specifically about the fund. Do you realize that this fund is bigger than the New Zealand Superannuation Fund? Well, New Mexico’s time has come, as its SWF – known today as the State Investment Council (SIC) – has officially done something to warrant attention: Winthrop Quigley of the Albuquerque Journal has just published an in-depth article on the fund.

What’s the scoop? Apparently, after sub-par returns (against a variety of benchmarks) for over a decade, a new management team was recently hired to turn the place around. The team is anchored by the new State Investment Officer Steven Moise and his deputy Vince Smith. And, now that there’s a new team running things, some of the fund’s dirty laundry is being aired out for all to see. For example, under Gary Bland, the SWF’s team apparently spent most of their time trying to pick winning stocks.

Encouragingly, the SIC’s dart throwing days are over. The new plan being crafted by Moise is focused on getting the asset allocation right instead of wasting resources on in-house trading:

“Moise and Smith say the new SIC investment philosophy holds that “asset allocation is the primary determinant of portfolio return” and that fund manager performance “has the least impact on long-run portfolio returns.” That is the opposite of SIC practice when Gary Bland was state investment officer…

The SIC staff is being reassigned to focus on asset allocation, understanding economic trends, identifying ways to take positions in assets they believe will deliver the best performance and research markets”

That is eminently sensible. I’ve heard a number of different stats used, but most investors will tell you that the asset allocation decision drives something in the range of 70-90% of a fund’s overall return (and yet it is far too often discounted in the decision-making process in favor of sexier trading operations).

Under Moise, the SWF also plans to focus on its comparative strengths (e.g. it’s long-term time horizon) as well as implement sound investment governance policies. Here’s Quigley with some highlights:

“SIC plans to increase its investments in real estate and find ways to invest in timber land, infrastructure, farm land, energy-related assets and non-energy commodities. These assets should provide stable value and generate income, Smith said…

Moise plans to raise the fees paid to advisers and hold them much more accountable than the SIC did in the past. “You can’t get the best in class if you don’t pay for the best in class,” he said…

“Believe it or not, we never had an investment committee,” Moise said. The staff and the council each have investment committees now…

There are plans to “to introduce legislation in January’s session to remove the governor as SIC chairman. As chairman the governor is responsible for investment decisions, Keller said. “I don’t know why any governor would want to be on the hook for every investment decision for the state,” he said. Removing the governor as chairman also depoliticizes the SIC decision making…

Moise said SIC staff won’t pick individual economically targeted investments any longer because they don’t know how to do it. Instead, those kinds of investments will be placed by venture-capital and other firms with the expertise to identify investment opportunities and to help startup companies succeed, he said”…

Anyway, all this is to say that, under the guidance of Moise, New Mexico may soon have a very well managed SWF indeed. And it only took the state 53 years to get there!

Who Deserves Credit for the Big SWF Idea?

Ashby Monk

If you follow me on Twitter, you’ll know that I’ve been playing some SWF word association games. Well I’ve got another one for you: If I say, ‘governments that kicked off the SWF era’ or, how about, ‘governments that deserve credit for the big SWF idea’, what would you say?

At first blush, I’d expect you to come out with “Kuwait” or “Abu Dhabi” or “Singapore” or (if you’re really good) even “Kiribati”. But I can pretty much guarantee that you wouldn’t say, “the UK” or “USA”. After all, SWFs aren’t Western, right? In fact, they represent challenges to Western hegemony, don’t they? They’re products of emerging market imbalances, aren’t they?

Well, maybe I’m late to the party here, but I think credit for the ‘big SWF idea’ actually resides with…the UK and the US. I know that seems odd and runs counter to our current notions about SWFs. But let me — a self-proclaimed history dimwit — give you a history lesson (or at least try to).

It’s widely noted (and accepted) that Kuwait was the first country, in 1953, to set up a SWF. In this case, the acclaim for this remarkable decision is often given to the forward thinking ruler of Kuwait at the time, Sheikh Abdullah Al-Salem Al-Sabah. In his wisdom, he apparently decided that the money should be set aside for the long-term welfare of the people of Kuwait. And I don’t doubt that. Rather, I’d simply note that this SWF, which was known at the time as the Kuwait Investment Board, was established eight years before the country attained independence from the UK. And, moreover, the fund was set up in London. So, at the very minimum, we can assume that the Brits had some influence over this decision (and may in fact have had the ‘big SWF idea’).

The second country to set up a SWF, in 1956, is widely accepted to be Kiribati. In this case, a fund was set up for phosphate mining revenue. The history buffs among you will recognize that Kiribati was still under British rule at the time (until 1971 actually). And it is known that the British administration was behind the levy on phosphate exports that ultimately led to the Kirabati Revenue Equalisation Reserve Fund. So, once again, the Brits were there at the beginning.

Now things start to get really interesting. Any guess as to what the third country was to set up a SWF in 1958? To be fair, that’s sort of a trick question, as it was sponsored by a sub-national government: the US state of New Mexico and the State Investment Council. And do you know who set up the fourth SWF in 1974? The US State of Wyoming and the Permanent Wyoming Mineral Trust Fund. And North America wasn’t done yet, as the next two SWFs to pop up were in Alaska and Alberta in 1976. In short, the Brit’s Anglo-American cousins in North America also played an important role in legitimizing SWFs in these early years.

Now, it’s true that Singapore set up Temasek in 1974, but, at the time, it was really just a holding company and not technically an international portfolio investor. (And, by the way, Singapore was also a British Colony until 1961, so there was probably some remaining British influence.) It’s also true that the Abu Dhabi Investment Authority was established in 1976, but, there again, it’s probably reasonable to suggest the Brits had some influence in that decision (as the UAE had a ‘special treaty’ with the UK until 1971).

All that being said, I don’t want to give the Brits too much credit here. After all, they didn’t bother to set up a SWF of their own when oil revenues came pouring in from the North Sea! (A decision that still irks Scotland something fierce). To be sure, this would be a very welcome pool of cash today.

I guess I just find it interesting that the first SWFs were set up under the purview of British and American governments. Over time, the West has come to see SWFs as “foreign” and “non-Western”. And yet, they were ultimately British and American creations; the idea and their legitimacy actually came from the West!

And, the more I think about it, the more it makes sense. Both countries were already home to global financial centers (New York and London) thanks to the financial capital flowing out of pre-funded pensions and into asset managers’ coffers. Let’s also not forget that Markowitz unveiled Modern Portfolio Theory in a 1952 Journal of Finance article. As such, these countries were clearly in a ‘financial state of mind’, which means it wouldn’t have been too far a leap for these governments to see an opportunity to use financial markets in innovative ways. Enter the SWF.

Weekend Reading

Ashby Monk

After much anticipation, the IMF has finally released its edited volume on SWFs entitled “Economics of Sovereign Wealth Funds: Issues for Policymakers.”

I wasn’t on the IMF’s pre-publication marketing distribution list, so I don’t have a copy yet (…cue Rodney Dangerfield impression…) and thus can’t really comment on the book’s contents.

But I can tell you that my buddy Andrew Rozanov (who authored one of the chapters) has a copy and says it’s awesome. So, I’ll be dutifully purchasing my copy this weekend.

Given that past IMF work in this domain has been fantastic, I’m sure I’ll be returning to the book on this blog in the future.

Enjoy your weekend!


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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