Archive for January, 2011

ADIA Spots Future Leaders (Very) Early

Ashby Monk

It’s not every day you get to sit down and read an in-depth interview with one of the Abu Dhabi Investment Authority’s portfolio managers. Today, however, is one of those days: Saeed Al Hajeri, Executive Director of ADIA’s well-respected Emerging Markets Department, has given a long and interesting interview to CFA Magazine this month. For anybody that has even a marginal interest in SWFs, consider this required reading.

I know what you’re thinking: since we are reading this interview direct from ADIA’s website, the communications team has probably added so much polish to everything (and vetted every single word in the interview) that there’s nothing left of interest. Actually, while I agree that the communications team has probably done a fair bit of polishing, the interview is still interesting. In fact, it’s fascinating.

Saeed Al Hajeri covers a wide range of topics, from the fund’s emerging market investment strategy and infrastructure focus to its participation in the Santiago Principles. However, what I was most interested to read about was the fund’s focus on talent management. Here is Mr. Al Hajeri on the topic:

“It sounds like a cliché, but our strength really is our people. And ADIA devotes considerable time and resources to ensuring that we not only attract the best local and international talent but also that we are able to motivate and retain them.”

Actually, it doesn’t like a cliché to me at all. I recently had a conversation with an EVP at a large government fund, and he told me that what was in the heads of his employees was the single most important factor in his fund’s success or failure. As he put it, if you can’t attract, incent and retain the necessary talent, then you can’t expect to manage money successfully in global financial markets. So, this begs the question: What is ADIA doing to attract and retain the necessary talent?

A lot of things, actually, but one of its priorities has been to develop local staff. After all, two-thirds of the professionals at the fund are currently foreign, so the SWF has made it part of its mission to nurture local talent and bring this percentage down. Remarkably, this includes spotting promising youths and nurturing their talents from secondary school through university:

“ADIA is firmly committed to developing local talent. Our scholarship program reaches back into United Arab Emirates schools to identify, develop, and track students at an early age who we believe have the potential to be leaders of the future. We actually interview them and conduct psychometric testing at the high school level. From there, we monitor them. We get a quarterly report and have a dedicated department, following up on them and making sure they are doing their studies. Upon graduation, selected students are sponsored by ADIA to attend universities, usually in the United States or Europe, after which an assessment is made by both parties as to their interest and suitability for a career at ADIA.”

For the sci-fi types out there, I’d call this an “Ender’s Game”-type human resource strategy. You spot remarkable children, and you develop them throughout their lives until they are ready to take up the challenging tasks central to your society’s wellbeing. And, because ADIA has an inter-generational time horizon, it can adopt a multi-decade recruitment strategy. All credit to ADIA for recognizing its long-term horizon and applying to its human resources strategy accordingly.

Weekend Reading

Ashby Monk

The IMF has just released a new working paper by  Peter Kunzel, Yinqiu Lu, Iva Petrova, and Jukka Pihlman entitled, “Investment Objectives of Sovereign Wealth Funds—A Shifting Paradigm.” If you’ve been curious what SWFs have been doing with their money — before, during and after the crisis — this is a must read. Here’s a blurb:

“This paper examines the ways in which different types of SWFs approach their investment objectives, describes the impact of the crisis on SWF performance, reviews the extent to which portfolios have been reallocated, and draws lessons about how and why the investment behavior of SWFs has changed. Looking forward, it also considers additional issues that may need to factor more prominently in SWF’s investment strategies, including macro-stabilization and asset-liability management considerations, as well as forthcoming adjustments to the global regulatory environment.”

And, weighing in at only 14 pages, the paper manages to deliver on all of that. One of its accomplishments is explaining why a fund’s mandate should influence strategic asset allocations (SAA). After all, a savings fund, a stabilization fund, a reserve investment corporation and a pension reserve fund have different constraints that should, at least in theory, drive SAAs in different directions. Also, the authors do a good job of teasing out insights from the recent crisis. Anyway, here are some of the most interesting bits:

“The crisis has affected SWFs’ asset allocations in different ways. Several SWFs with stabilization objectives have reduced their shares of cash holdings either because of the use of cash resources (Chile-ESSF), or because of moving to fixed income (Trinidad and Tobago). Alaska Permanent Fund and Ireland National Pension Reserve Fund have increased the share of their cash holdings. SWFs with previous investment in alternative assets have increased their investments in such assets, presumably with a view to further diversifying their portfolios. The KIC has introduced alternative assets investment and increased their equity shares. Notwithstanding the impact of the crisis, some SWFs have also continued with the implementation of previously approved SAAs—for example, Norway has increased equity shares, and the Australian Future Fund has introduced fixed-income and increased equity and alternative assets investments in its portfolio. In the case of Norway, the continuous implementation of the SAA helped it to benefit greatly from the rebound of risk assets since early 2009.”

“Still, in many cases a profound change in an SWF’s SAA may not be justified. Instead, SWFs may need to improve their communication strategies and put more effort into educating stakeholders about their operations and risks. In the case of savings-type SWFs, this direction requires that owners and other stakeholders understand the likelihood of encountering short-term losses and have the ability to tolerate them. This may be easier to achieve in an environment of overall political and economic stability, with well-engrained frameworks for medium- and long-term planning, and good crisis management planning and coordination.”

I couldn’t agree more with that last paragraph. Anyway, here’s a cool chart demonstrating how SAAs changed through the crisis:

Top Ten Tweets

Ashby Monk

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

  1. CIC’s Gao: “Theoretically we are a long-term investor…But you can’t really function on a 10-year horizon.”
  2. Medvedev makes good on promise for a new Russian sovereign wealth fund. Wants plans on his desk by March 1.
  3. Lex says think twice before front running Chinese investors. #goodadvice
  4. How much has China invested in Canada’s natural resources in last 18 months? According to this report…$10 billion!
  5. SWFs are reportedly turning to active management to bolster returns. Get out the dart boards…
  6. It looks like Gordon Brown personally invited the CIC to set up a London office. Toronto choice must sting.
  7. The Jordan-Qatar Joint Investment Fund may finally be getting going
  8. Apparently, India’s Petroleum Ministry is still planning a new SWF to acquire resources abroad.
  9. Li Ka-shing going where ADIA and CPPIB wouldn’t?
  10. Qatar Investment Authority must be pleased; Harrods just had a record year!

Israeli SWF “Not A Fantasy”

Ashby Monk

Earlier in the week, I noted that the IMF had asked Israel to begin the process of setting up a new SWF to house looming resource revenue from two recently discovered gas fields in the Mediterranean Sea. Well, the IMF apparently gets what the IMF wants: Israel will proceed with plans for a new SWF this year.

The news comes from Eugene Kandel, head of the National Economic Council, and was reported on Reuters and in the Wall Street Journal. The new fund apparently has the backing of Netanyahu and Finance Minister Yuval Steinitz, as well as broader support in government. So, as Kandel put it, the new Israeli SWF “is not a fantasy”.

Kandel seemed to justify the new SWF  on competitive grounds (i.e. to avoid Dutch Disease from the influx of unearned wealth) and on precautionary grounds (i.e. to have cash on hand in case of a catastrophic event, such as an earthquake). It should come as no surprise then that the economic team is already examining the experiences of Norway, which has adeptly used their SWF to combat Dutch Disease, and Chile, which has used its SWF to help rebuild after a devastating earthquake.

Whichever fund or funds end up serving as the blueprint for an Israeli fund, it’s pretty clear that Kandel already “gets it”:

“We’re going to set it up in such a way that it’s going to be invested abroad…It’s going to be run professionally without interference from current political needs, with an eye on long-term investment…We are working on implementation. We would like that to be set up within a year.”

That hits on the right governance themes, in my view.

WikiLeaks on SWFs

Ashby Monk

Since WikiLeaks began publicly releasing US embassy cables, I’ve been watching out (typically via the Guardian and Aftenposten) for any that reference SWFs. And, while there have been a few (e.g. here and here), SWFs have played a very minor role and have only been referenced in passing. It would seem that US diplomats had overlooked the SWF phenomenon, which, by the way, had captivated much of the foreign policy world in 2007-2008.

Then, last week, I came across this “sensitive but unclassified” cable (REF: STATE 153075) from November of 2007, which is entitled “Norway and Sovereign Wealth Funds.” The cable offers a recap of a meeting between US embassy staff and Martin Skancke (the cable says “Martin Shanke”, but we can assume that’s just a spelling mistake).

It’s worth a look, as the cable offers some insights into the closed-door discussions that were taking place in 2007 about SWFs. In addition, it offers an insider’s take (Skancke’s) on the GPF-G’s operations. Here is a summary lifted from cable:

“In a November 5 briefing to the diplomatic corps, the Ministry of Finance DG reviewed Norways approach to Sovereign Wealth Funds and the status of Norways approximately $350 million Global Fund (formerly known as the Pension Fund). He said that Norways application of the Ethical Guidelines, which has heavily impacted US companies, is not ideal and an upcoming evaluation may help improve them. The DG also explained that Norway is considering possible divestments from companies building pipelines in Burma. Finally, he noted the possibility of positive investments in companies promoting the public good.”

As this suggests, the US diplomats were keenly interested in the GPF-G’s ethical guidelines and negative screens. Why? Well, perhaps it is due to the fact that 12 of the 21 companies (at the time) that the Norwegian SWF had “negatively screened” out of their portfolio (i.e. divested from) were American.

“Moving to the Ethical Guidelines which have been a source of controversy, Shanke said that the Fund has a negative screening process as well as an ad hoc review process. The negative screening is designed to weed out companies who handle “weapons that through their normal use may violate fundamental humanitarian principles” which he identified as weapons such a cluster munitions or nuclear weapons. (Note: it is as a result of this screening that Norway divested from several American arms manufacturing companies.)”

The cable then goes into detail on the screening process and how the American companies ended up on the notorious exclusion list. And then the cable recounts an interesting exchange between an embassy official and Skancke:

“In response to a question from Emboff which suggested that companies that operate transparently and in open economies may be discriminated against, Shanke agreed that that could happen and that the process is second-best. In the 1990s, his Ministry had argued against an ethical screen because of this problem. Today, with more information available, he thought the system was good enough. He pointed out that an evaluation of the whole process in 2008 may lead to fine-tuning. He welcomed engagement with others on this issue. Finally, he noted that more transparent companies are often easier to engage and so it is more likely that the Central Bank would evaluate them as amenable to negotiations-something which might offset the initial discrimination.

In other words, Skancke ends by suggesting, ‘If we divested from your companies, it’s probably because we had a pretty good reason.’ Fascinating stuff. Now, where’s that US embassy cable from Beijing on the CIC?

IMF To Israel: Start Planning New SWF

Ashby Monk

Israel may soon be a rather significant purveyor of natural gas, as two gas fields recently discovered off the port of Haifa are thought to be capable (albeit not certain) of generating billions of dollars for the state in taxes and royalties. So — the question on everybody’s minds is — what will Israel do if the gas leads to a sudden influx of cash? And, since you’re reading about this here, you can probably guess what kind of advice they’re getting…

According to the IMF, Israel should, in the medium term, set up a new SWF. The advice appeared in the IMF’s 2010 Article IV Consultation, which was made public yesterday:

“In the medium-term, recent natural gas discoveries could have a positive impact on fiscal sustainability. While the likely impact of the natural gas is highly uncertain, reforms to adopt international best practice in taxation of natural resources, including appropriate pricing arrangements in the tax and in securing appropriate intergenerational distribution of the proceeds can help in ensuring a positive impact on fiscal sustainability. Accordingly, the first use of such tax receipts should be to reduce public debt, given that overall revenues will be modest on current estimates of the volume of gas. However, if the gas wealth proves to be much larger than anticipated, additional revenues could be placed in a sovereign wealth fund to ensure intergenerational equity and to safeguard against possible Dutch disease effects.”

Sensible! First, pay down external debt with the proceeds. Next, if the resource rents keep flowing, use a SWF to facilitate stabilization and inter-generational distributions. That’s the same advice I’d give to any lucky prospector!

As a side note, Lebanon, which has its eyes on the very same gas fields as Israel, is one a step ahead: The country set up a new SWF “just in case” back in August 2010.

Fun With Bubble Charts

Ashby Monk

This morning, I stared at this fun new SWFI bubble chart for five minutes trying to spot something…anything…that resembled a trend of some sort. But I just didn’t see how to ‘fit a line’ to this data. In other words, I couldn’t see how any of the variables plotted (size, source of capital, transparency, geography, or strategy) related to one another. It all just seems random.

Then it hit me, there’s a fundamental problem with the underlying data: When we move along the x-axis from right to left, the data on the y-axis becomes less and less reliable. In other words, we may know exactly how Norway manages its money, since it is highly transparent. But it is quite difficult for us to say what the funds in the middle and left of the chart are actually doing with their assets. For example, do we really know what SAFE and ADIA are up to? Now, I acknowledge that it would be relatively simple to see if these funds are making strategic investments, as such investments typically find their way into news articles. But are these funds investing their assets actively? (I assume that “active” is somewhere between “passive” and “strategic” on the y-axis.) What percent of their assets are in-house? What do their external mandates look like? For these leftward funds, it’s hard to say. 

Anyway, it’s a fun chart. I’m glad they put it together. It’s not SWFI’s fault the data become less reliable as funds grow increasingly secretive.


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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