Archive for May, 2011

Deep Thoughts By Tan Sri Dato’ Azman bin Hj. Mokhtar

Ashby Monk

It is fitting that Malaysia’s sovereign wealth fund would be called Kazanah Nasional, which means “national treasure” in Malay. Incorporated in September 1993, the fund holds and manages the government’s commercial “treasures” and, additionally, has the mandate to create new wealth through strategic investments in industries deemed to be important for the country’s long-term development. The complicated nature of the fund’s multitude of objectives (what Khazanah calls its “triple bottom line”) could be expected to dilute the fund’s clarity and, as a result, damage financial returns. But, interestingly, the $24 billion fund has had a remarkable few years, with a compound annual growth rate (CAGR) over 13% since 2004! How’d the Malaysian SWF do it?

Some (and perhaps much) of the credit rests with Managing Director Tan Sri Dato’ Azman bin Hj. Mokhtar, who took over at the helm of the Malaysian SWF in 2004 when the run of good years began. Indeed, Mr. Azman’s success at Khazanah has been quite impressive. A former banker at UBS and Salomon Smith Barney, he has developed a reputation as a savvy investor and turnaround artist. And, lucky us, he is more than happy to expound on some of his secrets to success. In fact, after reading recent interviews and speeches, I feel compelled to bestow upon him the honor of a “deep thoughts” post. So without further ado, here is Mr. Azman…

 …on the types of people he looks to hire into his organization:

“Sometimes, I am reminded by Marx, not Karl, but Groucho, who says that you should not enter a club that would have you. Generally, we hire people who don’t want to join, if you get what I mean.”

…on his management style:

“I coined the term macro managing instead of micro managing. In the areas of strategies, for example, it’s a joint thing, so we discuss with the CEO and in the boards. But if companies are in trouble and they are not managing their affairs, there will be a period of time that we do manage. You roll up your sleeves and go in. But only for a period of time and then you have to source and find the right CEO and the right successor. The best thing is to leave them alone, and have periodic checks in terms of performance management.”

…on the importance of governance and management in his organization’s success:

“…before we get too enamoured about new, new things, one key success factor in delivering results we believe has been the discipline and doggedness of execution, of relentless and continuous improvement and of detailed programme management. These are the simple, even boring, incremental building blocks of transformation work. Staying the course is at the heart of this and indeed I am reminded by the wisdom of the American comic and sometimes philosopher Woody Allen, who rightly observed that “Ninety percent of life (and success) is showing up”. A variation, no doubt on Edison’s famous line that  “Genius is 1% inspiration and 99% perspiration”. 

…on the balance between public and private involvement in the Malaysian economy:

“We would do well to remember that indeed, as has been reminded by our elders, that pragmatism and a non-dogma dogma, or a no-ideology ideology is indeed a touchstone principle established by the founding fathers of modern Malaysia. And this principle has served us well, and so long as we remain honest and sincere in our analysis, in our planning and then in our application, I believe it will continue to serve us well. Indeed, as Deng Xiao Ping memorably said, it does not matter whether the cat is black or white, so long as it catches mice.”

As it turns out, Mr. Azman was recently appointed to another three-year term at the helm of the Malay SWF. So perhaps we’ll have the pleasure of more deep thoughts…and Malaysian successes…in the near future.

Top Ten Tweets

Ashby Monk

I missed the chance to do a roundup of sovereign fund news on Friday, as I was up in Alberta, Canada learning about my homeland. (I was born in Edmonton). So here it is: Your top news items from the past week’s @sovereignfund Twitter feed:

  1. Nigeria officially has a new SWF.
  2. India continues to mull over new strategic SWF for energy investments.
  3. Some big Libyan Investment Authority revelations: Here us the source document.
  4. Israel moving closer towards a new SWF to manage looming gas revenues: Government expects > $150 billion.
  5. Aabar issues $1.76bil in convertible debt. (Note: Since Aabar went private bonds will convert into Daimler shares.)
  6. CIC agrees to be cornerstone investor in Huaneng Renewables’ IPO in Hong Kong.
  7. Abu Dhabi’s Invest AD (i.e., ADIC) will partner with Japan’s SBI in $100 million PE fund for Turkey.
  8. Rumors are swirling about some secret new $500 million, CIC-backed, hedge fund. (Heavy emphasis on “rumors”.)
  9. Calling all alternative asset managers: Alaska Permanent Fund has announced some new mandates.
  10. Thailand may set up new SWF for reserve diversification.

Guest Blog: Libya’s Loss-Making SWF

Peter Cole just completed his Master’s thesis at Oxford on the Libyan Investment Authority. Since I’m on the road again today, I’ve asked Peter to comment on the recent revelations about LIA’s investment activities. Over to Peter!

Peter Cole

The leaked LIA presentation, if genuine, is a pretty remarkable event in the SWF world. It’s by far the most explicit and detailed exposition of that authority’s workings I’ve ever seen. The portfolio spread, subsidiary spread and names of companies/banking partners all ring true. It’s interesting that the presentation is in English, though. There are few foreign audiences for LIA to whom it would have been inclined to present such a detailed synopsis of its operations.

The report shows that LIA by Q2 2010 had roughly $20bn held in deposits with various banks (mostly Libya’s Central Bank), just over $5bn in equities, $3.4bn in bonds and around $3.5-4bn in various ‘alternative’ financial products such as hedge and private equity funds. Then there is another $17bn managed by subsidiaries like the well-known African investment portfolios and Oilinvest (which owns ‘Tamoil’ and is responsible for the LibyaOil brand you see at petrol stations in Europe and Africa), plus Dalia, LIA’s London office.

The total reported assets of around $53-55bn are a far cry from the fund’s oft-quoted size of $65bn. What happened to the extra cash, if it ever existed? Well, there have been reports circulating for a while that LIA had lost significant sums on externally-managed funds. This new document seems to verify that, showing a remarkable loss of around $1.2bn in externally-managed equity derivatives. There’s a further $1.5bn loss on externally managed private equities and other structured products, and another $1.6bn lost on equity purchases made (it seems) directly by LIA. Those are quite major losses.

Then there’s the question of the Economic and Social Development Fund (ESDF), technically considered part of LIA and which received somewhere in the region of $10-$12bn from the Libyan government for a Qadhafi-inspired Wealth Redistribution Programme. A major embezzlement scandal was breaking around that fund when this report was produced. For whatever reason, it doesn’t show up on the report at all.

The scale of LIA’s losses doesn’t seem to come down to the fund’s ‘strategic’ outlook (i.e., consideration of political priorities rather than pure economic returns) simply because LIA apparently differentiated between its ‘strategic’ and ‘non-strategic’ investments, and the former only account for around $450m of losses. It’s still not clear to me what the difference between strategic and non-strategic is, by the way; ‘strategic’ investments seem generally larger and at first glance include companies that were active in Libya’s economy and/or companies where investment mattered to diplomatic relations. But then the same could be said of several of the companies deemed as ‘non-strategic’.

Instead, the scale of the losses through external relationships and high-risk equities and financial products mirrors some of the (unverified) anecdotal reports circulating about how some of those relationships were brokered informally by point-men who stood inside or outside the fund and ‘pushed through’ decisions on behalf of political allies (rather than for financial merit).

However they were selected, though, LIA’s confidence in its external partners that collectively lost around $2.7bn of LIA’s money must have taken a knock. As too must have its appetite for engaging in direct equity purchasing. LIA’s Central Bank and Foreign Bank also wielded a strong influence within the organisation which circumscribed the damage done by LIA’s riskier adventures – but its attempts to get its own house in order after these losses were uncovered cannot have been straightforward. For one thing, the external consultancies that worked with LIA on governance issues themselves had a complicated relationship with the country’s political authorities. For another, there is the thorny question of those subsidiaries, whose activities were apparently outside the purview of this report. There may be more revelations to come about LIA’s African and internal investment activities.

Guest Blog: Greek SWF — Not such a bad idea

Adam Dixon

Yes, Greece is in a difficult situation. Some see default on the horizon. Some see an exit from the euro. Some see German taxpayers providing a yet larger lifeline. Whatever the scenario, all agree that the Greek economy needs to grow faster and the government needs to do something with its balance sheet.

While the announcement the other day about setting up a Greek SWF may seem fanciful, it is actually a rather compelling idea. The assets of the state are apparently quite substantial. A couple of weeks ago the IMF’s Antonio Borges indicated that the government’s Real Estate Development Company had a portfolio worth €280bn. The government also has large holdings of the national telecommunications firm OTE, the Piraeus and Thessaloniki Port Authorities, the Athens Airport, and the postal savings system. Suffice it to say, the government has more tools at its disposable than simply raising taxes (or collecting them better) and making people work longer, both of which are inevitable.

Yet, don’t count on a fire sale, and don’t expect the Greek public to acquiesce so readily to privatization. Hence, a Greek SWF doesn’t sound like such a bad idea. But, setting up a SWF isn’t simply about limiting a public backlash and protecting “sovereign wealth”. It is about accounting and price discovery.

If asset privatization occurs at a measured pace, the government has a more accurate means of valuing the assets that it continues to hold. With a transparent SWF, the market would then have a better picture of the government’s ability to pay. But, this is just a drop in the bucket. Ultimately, the market wants to see real growth and more manageable liabilities.

The Importance of Downside Expectations

Ashby Monk

I’ve long wondered why institutional investors don’t (to my knowledge) put out estimates for “permissible losses.” In other words, why don’t sovereign and pension funds offer their stakeholders an estimate of what would be the maximum short- and medium-term loss that would be deemed “permissible” given specific levels of risk? In my view, this would be a very useful number for any long-term investor to be able to point to should performance turn negative in the short term. For example, the policy could say that unless the fund loses more than XY% in a year or Y% in a five-year period, stakeholders should not interfere in the fund’s operations. Beyond that permissible level, however, a review of operations is required. Such a policy could be quite useful in avoiding some of the legitimacy troubles that many investors had during the GFC with their domestic constituencies.

Well, it turns out I’m actually not all that creative, as I learned this morning that the New Zealand Superannuation Fund (a perennial innovator) has been using a permissible loss estimate in its communication strategy with stakeholders for some time. I saw the estimate for the first time in the fund’s new Statement of Intent, which, by the way, is worth reading in its entirety. (It’s a remarkable document; I could write five different posts from the material in there.) Anyway, here’s a blurb about the NZSF’s “worst case downside return” estimate:

“Financial market returns are inherently volatile. In any given period actual returns will fall somewhere within a wide range of possible returns. For the estimated ‘worst case’ downside return we look at lowest percentile expected return (or a 1-in-100 event) for the period. If actual returns are worse than this, then either a rarer-than-expected event has occurred or we have taken more risk than we assumed.

Our ‘worst-case’ modelling work (based on a 20-year investment horizon, which is also the basis for the Reference Portfolio) suggests there is a 1-in-100 chance of Fund returns being worse than: -31% in any one year; -5% p.a. in any consecutive five-year periods; or -3% p.a. in any consecutive 20-year period. In any such case, we need to explain what has happened (and will do so in the relevant period’s Annual Report).”

That’s actually really cool. And no doubt the estimate will be useful for oversight committees and stakeholders. In a way, the act of publishing a permissible loss level serves to manage the expectations of the fund’s stakeholders. And, crucially, if the fund has public ‘buy in’ for the operations (including potential losses), then the public would (in theory at least) not challenge the viability of the SWF during short- to medium-term downturns in the market (unless of course returns dropped below the permissible level). And this ‘freedom to operate’ has important commercial benefits, as it ensures that the fund’s investment horizon will remain long-term, and that it will never have to sell assets at a discount because domestic stakeholders changed their minds about a certain strategy or policy.

In other words, taking a long-term investment approach requires managing short- and medium-term return expectations (both on the upside and downside). And as I’ve said several times, I think SWFs can generate market-beating returns by taking a long-term view and moving beyond the short-term noise. Perhaps this “permissible loss level” is a useful tool in this regard.

GCC Investors Prefer Direct Investments

Ashby Monk

It’s generally quite hard to come by information on the investment behavior of SWFs in the Gulf. So, the 2011 Middle East Asset Management Study by Invesco — which seeks to understand the “preferences” of these investors — is worth a quick read. In particular, I was surprised to see the extent to which GCC investors prefer direct investments compared to their expatriate counterparts. According to the study,

“GCC investors allocate 62% of their investible assets to direct investments…Put simply, GCC investors access their investments directly rather than using more diversified ‘fund’ structures.”

Put another way, the Invesco study finds that GCC investors are generally uninterested in the sorts of funds that asset managers, such as Invesco, provide. Now that’s not something you’d expect to see in an asset manager’s research report. Interesting. Anyway, for some details on how Invesco conceptualizes the SWF landscape, see this chart:

A New Greek SWF? Not Really.

Ashby Monk

I’m trying my best this morning to understand Greece’s announcement that it will set up a new “sovereign wealth fund“. A country that had a 2010 budget deficit of 10.5% and public debt in the range of 140 percent of GDP will be the next country to join the SWF club? (Cue vigorous head scratching).

In case you missed it, Finance Minister George Papaconstantinou unveiled a new SWF this morning that will hold state assets in a sort of privatization queue. The new fund will facilitate the sale of roads, ports, bridges and any other state assets to help stave off sovereign default and restructuring.

Whatever Greece calls this new finance vehicle (and I’m inclined to call it something other than a sovereign wealth fund), it’ll have a very difficult road ahead.


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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