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!

3 Responses to “New Mexico Gets Governance”

  1. 1 Frank Ashe December 21, 2010 at 2:33 pm

    Ashby, You said: “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).”

    This is an often misunderstood statistic, and when we talk of sovereign wealth funds, and other long-term investments such as individual’s own pension funds, can lead to sub-optimal policy. The point is a little pedantic, but important, so bear with me.

    The 70%-90% of returns being driven by asset allocation refers to the proportion of the variation of monthly returns that is explained by asset allocation. This is not relevant for an SWF. When we look at the proportion of cumulative long term returns, say over 20 years, it is possible that the additional return generated by not following the naive benchmark for the asset class may explain more than 50% of the total return.

    This is not a call for active management, as per New Mexico, but a call for more understanding of the sources of return. For instance, the standard benchmarks used to gauge stock market returns (FTSE for the UK for example) are known to be inefficient and strategies can be adopted by SWF to take advantage of that inefficiency to achieve expected returns larger than the benchmark over the long run.

    • 2 Ashby Monk December 22, 2010 at 9:25 am

      Thanks, Frank. Lovely comment. Can you suggest any recent papers I might read on the 70-90 assumption? I have to say, I do hear that quite a bit…even last week! But I definitely take your point and agree that there are more efficient strategies and benchmarks. Cheers!

  1. 1 Who is the King of SWFs? « Oxford SWF Project Trackback on April 7, 2011 at 11:50 am

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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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