Archive for July, 2011

Weekend Reading

Ashby Monk

I know it’s hard to think about much other than the debt ceiling debate right now. So, listen, I’ll make a deal with you…if you’re good and do your weekend reading, I’ll give you a debt ceiling treat at the end. OK? Alright, I’ve got two topical papers for you this week:

First, Attilio Meucci has a new paper entitled “‘The Prayer’ Ten-Step Checklist for Advanced Risk and Portfolio Management“. Truth be told, I barely made it out of the abstract before Meucci dropped me with some serious ‘Greekulus’. Notwithstanding, I understood enough of the gist to recognize that a ‘prayer-risk-checklist’ could be kind of useful for investors heading into next week (“…the penitent man will pass“).

Second, Charles Roxburgh, Susan Lund, and John Piortowski have a new report entitled “Mapping Global Markets 2011“. I know I linked to this earlier, but I just figured you’d want a last look at the global map of finance before the US Congress makes it look like a quaint relic of the “good old days” — back when governments governed and risk-free assets were, you know, risk-free.

Now, as promised, here’s your debt ceiling treat: “The Great Debt Ceiling Debate (PG-13).” If laughter really is the best medicine for what ails, I’m fairly certain it’ll come in handy over the weekend.

Try your best to enjoy yourself.

The Daily Brief

Ashby Monk

  • More Irish handwringing over NPRF’s directed investments:  Three quarters of its AUM are in 2 struggling Irish banks.
  • India puts out the welcome mat for SWFs.
  • The economic geographer in me thinks this report is awesome: Mapping Global Capital Markets.
  • Oh that new Italian SWF? The one to protect firms from foreign takeovers? Based on France’s FSI? Yes. That thing’s real.

And here’s a reminder of some of the biggest stories from the past week:

  • Temasek has appointed Jimmy Phoon as CEO of its $4 billion hedge fund SeaTown.
  • America’s biggest state pensions made returns over the past decade less than half of what was needed to keep up with promises.
  • Tunisian authorities announce plans to create a sovereign wealth fund called The Future Generations Fund.
  • The Government of Singapore Investment Corporation’s latest Annual Report is out!
  • The China Investment Corporation’s latest Annual Report is out!
  • State Oil Fund of the Republic of Azerbaijan saw assets increase by 33% in last 6 months (!) to roughly $30 billion.
  • Hillary Clinton points to SWF Santiago Principles as model for developing ‘principles for prosperity‘.
  • Ashby Monk launched new Daily Brief segment for his blog…and there was much rejoicing.

Korea’s Kalb Backs SWF Cooperation

Ashby Monk

I’ve been keenly interested in the notion of  “SWF Cooperation.” In fact, this topic was one of my ‘top five stories’ to remember from 2009, and, a few months back, I wrote a post that summarized some of my main conclusions about the benefits of SWF collaboration:

  • the benefits of having like-minded funds as partners when making direct investments in illiquid assets;
  • the economies of scale that come with pooling resources;
  • the research that shows that clubs negotiate better prices for assets than single investors;
  • the idea that working together can help to overcome some of the challenges of “frontier finance”, whereby investment decisions are moving from New York, London and Tokyo to Juneau, Edmonton, Oslo, and Lagos;
  • the ability to form networks of global partners to leverage local asymmetries on a global basis; and
  • the benefits of investing alongside investors that have the same long-term time-horizon.

That was (and is) my position about collaboration. It isn’t without problems, but I’m convinced that there’s considerable upside to these relationships.

And, as it turns out, I’m not alone. In fact, the “pro-SWF-cooperation camp” just got a heavyweight new camper in the form of the Korea Investment Corporation’s CIO Scott Kalb. That’s right; the KIC’s website published this week a brand new paper by Mr. Kalb entitled “The Growing Trend of Cooperation among Sovereign Wealth Funds.” It’s an interesting piece of work. Sure I like it because it provides some unique insights into the behavior of one of the world’s most prominent SWFs. But, most of all, I like it because Mr. Kalb seems to agree with my views on the subject (and I usually like not being wrong about stuff):

  • He agrees with the locational advantages argument, noting the benefits of sharing information to pinpoint future performers;
  • He agrees that working together can mitigate reputation and headline risks;
  • He agrees that collaboration among like-minded investors can result in a better alignment of interests than there is in traditional PE vehicles;
  • He agrees that it can provide political cover for foreign investments;
  • He also notes that there are cost savings associated with the economies of scale; and
  • Truth be told, he takes my reasoning a useful step further in certain places, which is cool.

In addition, I thought Kalb’s reflections on a specific case study were quite interesting; the Chesapeake Energy transaction where a variety of SWFs came together to make the investment. Here’s a blurb:

“SWF from various countries, along with other long-term oriented institutional investors, cooperated to invest in a large firm in a third party country. The investors were able to put significant capital to work achieving scale and size. They were able to lower costs by avoiding private equity management fees and sharing financial and technical advisors. They worked together with management in setting terms and conditions for the investment and follow-on governance procedures for reporting and monitoring. For the SWF, teaming up with each other and with other long-term oriented institutional investors made it explicit they were purely financial investors, and the group and firm were able to smoothly guide the transaction through all regulatory requirements and hurdles. Apart from acquiring the necessary capital, Chesapeake was able to deepen its shareholding structure, adding an international element with positive implications for future global expansion plans. Most importantly, a group of SWF and other institutions was able to help a major US firm with its restructuring effort in a mutually beneficial non-threatening transaction that has been successful for all concerned.”

Sounds like a good deal to me (albeit quite complicated to coordinate). It’ll be interesting to see if more “Chesapeakes” pop up in the coming year.

The Daily Brief

Ashby Monk

  • Some interesting thoughts from outgoing Alaska Permanent Fund CIO Jeff Scott.
  • Ireland’s National Pension Reserve Fund (or what’s left of it) has reduced equity exposure 10% over fears about the debt crisis.
  • China’s SAFE pledging to make its reserve investment operations more transparent.
  • Rumor: Abu Dhabi’s Aabar may be helping Richard Branson take control of Northern Rock.
  • Temasek has appointed Jimmy Phoon as CEO of its $4 billion hedge fund SeaTown.
  • Ontario Municipal Employees Retirement System will acquire Scotland’s shipping firm V.Group for $520 million.

GIC in a Risky World

Ashby Monk

Singapore is small, it lacks natural resources, and it sits in a reasonably precarious geopolitical setting that could ultimately be hostile to its independence and economic prosperity. What to do?  To manage the risks to its physical and economic security, the government has built up a large cushion of financial reserves that (it hopes) will reinforce the country’s autonomy and independence in times of crisis. This is where the Government Investment Corporation of Singapore comes into play. Indeed, the political elites specifically see the GIC as a tool for managing the potential adverse consequences of living in an uncertain world. For example, the latest edition of the GIC’s annual report has a clear theme: The future is challenging and uncertain and the GIC stands to minimize and manage these challenges and uncertainties for the benefit of all Singaporeans.

All this is to say that the GIC’s existence and legitimacy is a function of the risks faced by Singapore. So it will not be a surprise to you if the GIC is ahead of the curve when it comes to “risk management” practices. And this fact comes through quite clearly in the fund’s annual report. Indeed, the GIC’s approach to “risk management” has three distinct components: portfolio risk; process risk and people risk. I think you’ll be particularly interested in the latter two (given that portfolio risk is the more standard form of risk management). Here’s a blurb from the report:

“Managing Process Risk: All investment and operations staff are required to identify, evaluate, manage and report risks in their own areas of responsibility, and comply with established risk policies, guidelines, limits and procedures. New investment products or strategies are subject to a risk identification and assessment process conducted by a crossfunctional group. This ensures that risks associated with the new product or activity are identified and analysed prior to the under taking of the new investment. Part of this process is ensuring that the required people and infrastructure such as systems, procedures and controls, are in place to manage these risks…We continuously monitor a set of key risk indicators pertinent to our business, in order to manage risk of loss resulting from possible slippages in GIC’s operations. Indicators such as late transaction processing, late report releases, stale prices and system downtime highlight potential risk areas to be addressed in a timely manner…Throughout the year, internal and external auditors scrutinize all operations and business processes. The deficiencies identified are required to be addressed within agreed time frames and reported to senior management.

Managing People Risk: Consistent with our long-term orientation, GIC’s remuneration policies and practices support and reinforce a culture of prudence in risk-taking, and recognise and reward our people on the basis of sustainable results. We require our staff to observe GIC’s code of ethics, maintain exemplar y conduct, and comply with laws and regulations, including prohibitions against insider trading and other unlawful market conduct. These are among the guidelines set out in our compliance manual maintained by the legal and compliance department. Staff must protect confidential information and handle material non-public information with due care. The manual also states policies relating to the management of conflicts of interest, gifts and entertainment, copyright rules, personal investments and whistle-blowing. We provide regular training to all staff to keep them current with compliance requirements. Staff also receive training on exchange regulations relevant to their responsibilities.”

Clearly, the GIC takes “risk management” to a new level by including “people” and “process” into the more traditional approaches focused on “portfolios”. Why has the GIC gone a step farther than other funds in thinking about risk? I’d wager that the precarity of Singapore’s geographic position (both physical and economic) has engendered a deep-rooted risk management culture in the GIC that colors all of their decisions. After all, the GIC exists to manage risks for the government and the country, so it should be natural to apply this risk logic to their own operations.

Anyway, I think that’s quite interesting. And it offers some additional insights as to why the GIC probably remains quite secretive about certain aspects of its organization. For example, the CIC’s annual report (which came out yesterday) included detailed financial statements; the GIC report had nothing of the sort. Perhaps this too is a sort of ‘geopolitical’ risk management (to prevent neighbors from ‘coveting’ their ever growing pool of resources a bit too much).

The Daily Brief

Ashby Monk

  • Ouch: America’s biggest state pensions made returns over the past decade less than half of what was needed to keep up with promises. That’s awful.
  • Reserve Bank of India Deputy Governor Subir Gokarn pours cold water on SWF debate. (Again)
  • Calling all private equity funds that deal with SWFs: Read this to avoid risk of liability under the Foreign Corrupt Practices Act.
  • Tunisian authorities announce plans to create a sovereign wealth fund called “The Future Generations Fund”.
  • GIC to invest $100 million in Indian healthcare company.

China Investment Corporation (Finally) Goes Long

Ashby Monk

In January 2011, Gao Xiqing, President of the $410 billion China Investment Corporation, was quoted as saying:

“Theoretically, we are a long-term investor…but you can’t really function on a ten-year horizon.”

At the time, I thought that was an unfortunate position (if understandable given the constraints on any investor). I thought the CIC, like many other SWFs, was in a unique position in that it had the ability to take intergenerational bets and incorporate long-term risks into investment decision-making. It was (and is) my view that there’s big upside for investors that can patiently invest in risky, illiquid assets and be able to ride out down years with appropriate rebalancing strategies in the troughs. In fact, I was so passionate about this point that, after Gao Xiqing’s comments, I said (quite publicly),

“…why not, Mr. Gao? If SWFs really do have infinite time horizons, shouldn’t a ten-year time frame be easy? And more to the point, why would sovereign funds give up the risk premiums that can be reaped from long-term illiquidity?”

Well, readers, I’ve got news. Since January, the CIC leadership has had a change of tune, and the fund’s latest Annual Report has some interesting new thoughts about the CIC’s time horizon. (By the way, once again the CIC annual report is a remarkable piece of work; it ticks all the boxes of what an annual report should do. I want to acknowledge that fact.) Anyway, here’s the CIC’s new view on investment time horizon:

“In January 2011, the Board of Directors decided that the investment horizon of CIC should be extended to 10 years to keep with its long term mandate and that a rolling 10-year annualized return would, over time, also become an important measure of investment performance, while continuing to measure and monitor annual portfolio return. This change allows CIC to think longer-term, invest over longer horizons and accept a higher risk return profile in its investment portfolio in order to better balance short-term pressure and long-term interests.”

Dare I even ask? Is it possible Mr. Gao was actually listening to what I had to say? Cue bucket of icy water: almost certainly not. Notwithstanding, I do genuinely think this is a great policy. And, given that people manage to measurements, I’d expect real change (so long as the fund has incentive compensation smoothed appropriately).

And, you might ask, what does all of this mean in terms of practical investment strategy? Here’s Lou Jiwei with an explanation:

“We reduced our cash holdings and increased our investments in alternative assets with a view to further diversifying our portfolio. We entered the year with 32% of our global assets in cash and ended the year with cash accounting for only 4% and USD 35.7 billion worth of newly deployed investment. As a long-term investor, deployment of our capital in 2010 was weighted towards private equity, infrastructure and other direct investments, guided by our strategic asset allocation plan.”

It sounds as if the CIC is going long to me!


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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