Guest Blog: What Others Can Learn From SWFs

Thomas F. Connolly
I wanted to start by thanking Ashby for allowing me to be a guest blogger on his fine website.  I’m an avid reader and find it insightful, focused and excellent.  When I started thinking about the many topics that I could cover, it seemed obvious to concentrate on Middle Eastern SWFs and to focus on providing some impressions of what others could learn from these important organizations.

I moved from New York to Abu Dhabi over ten years ago and have been involved with SWFs in the Middle East region for this entire time.  I worked with a SWF for over seven years and since this time have been working with BNY Mellon Asset Management, partnering with SWFs in the MEA region.  I have certainly been exposed to a number of issues and have witnessed a significant evolution in these organizations over this time.  I’ll try to address these improvements and successes one by one:

Developing local investment talent: This has always been a critical issue for all MEA SWFs and one that I can assure you they take very seriously.  When I see the way that these funds spend time and money identifying and nurturing talent, or the way they meticulously design and implement programs to train their staff, it’s clear that this is a great priority for them.  The Gulf SWFs have entire departments with significant budgets devoted to training and development and they are well organized to accomplish this task.  Each SWF executes this task differently, but I can assure you that none of them lack commitment in this area.  I am also impressed by the continuous improvement I’ve seen in training and development over the years. In my experience, I’ve not seen any other investment firms that come close to this level of commitment in the area of training and development.

Long Term Focus: This is one area that I think MEA SWFs have made the greatest improvements over the years.  There are a number of challenges to executing a truly long-term strategy, and I think the SWFs in the Middle East have made great progress here.  I have seen real evidence that SWFs have become more sophisticated at working with the asset management community, thus enabling them to take a longer term focus with their partners.  They have also set up new departments to invest in longer term asset classes that better suit their investment horizons.  I think this area remains a challenge despite these improvements due to pressures to succeed and to monitor performance.  Whether it’s internal investment teams or external asset management partners, it’s difficult to take a longer term horizon and to have the patience to allow a longer term strategy to bear fruit, especially if the investment underperforms in the shorter term.

Asset Allocation: The Middle Eastern SWFs have become well known around the world for a number of reasons.  Certainly the fact that they’ve been around for so long and their large asset size are contributing factors, but I think their adeptness at Asset Allocation has also captured the fascination of the world.  My impression is that they value this part of the investment process above all others and they don’t change their asset allocation decisions frequently.  I know SWFs in the Middle East have been able to add value in this area and I know the rest of the world could learn from this approach.  Whether or not it is all down to particularly talented individuals is a matter for discussion, but I think these SWFs have organized and positioned themselves well over the years to profit from Asset Allocation.

Investing “far from the herd”: When I moved to the Gulf from New York, I immediately noticed the feeling of being “far from the buzz/information.”  This caused me to change my investment approach and I think it led me to becoming a better and more successful investor.  I think this situation was a micro example of the isolation that all SWFs experience (despite having the financial elite of the world regularly beating a path to their door!).  Being far from the information allows an investor to take a longer view and to do better analysis by not being bombarded with short term noise.  MEA SWFs have learned to use this to their advantage over the years, and I’m certain that it’s improved their results.

Multinational work force: Each SWF in the Middle East has a different approach to using expatriate staff.  Whether the SWF has a high proportion of expat staff from around the world or not, all of the MEA SWFs have a truly international focus.  They all have a tremendous exposure to different parts of the world through their portfolios, but they also travel extensively and work with investment partners in all regions of the globe.  This tremendous exposure helps them to have a much broader, more all-encompassing view of the world, and I think it fits well with a number of the other points mentioned here. One example is the attitude of SWFs to the Emerging Markets.  I think most of them benefited from EM exposure to a greater extent than investors in developed markets and a contributing factor to this is likely the global view that these SWFs have.

Leveraging partnerships with the AM community: I have witnessed how SWFs partner with the Asset Management community from the inside and from the outside.  When I worked at a SWF, I remember being struck by how little even some of the top asset managers really understood about the needs of SWFs.  Despite this, there is clearly no lack of understanding of these needs from WITHIN the SWFs.  SWFs have significant expectations of asset management firms that exceed the obvious criteria to “manage our money well”.  I think investors around the world can learn from this singularity of purpose that you see in the SWFs.  They know exactly what they want from their asset management partners and they aren’t afraid to ask for it. 

Using their “rainy day fund” wisely: Although most SWFs were set up as “rainy day funds”, the credit crisis presented a more immediate opportunity for these funds to test their ability to provide stability to the financial systems of their respective countries.  I think the SWFs in the Middle East were excellent tools for their respective governments during this difficult time.  It’s not hard to imagine what could have happened in these countries (and indeed the entire global financial system) had these SWFs not been available to add liquidity and stability to the financial system at such a critical time.  I think it’s difficult to argue that this period was not an unquestioned success for the SWFs as providers of stability.  It’s no coincidence that arguments that SWFs were potential “destabilizers to the financial system” that were being tabled before the crisis are no longer heard.

Thomas F. Connolly, CFA, is Managing Director for MEA at BNY Mellon Asset Management.

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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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