Weekend Reading

Ashby Monk

In case you haven’t heard, we’re melting here in North America. I know it’s July and we should toughen up, but I’m struggling. It’s just so hot. This is why I’m recommending that you take this week’s dose of learned leisure exclusively in combination with a (malted) beverage poured into that mug you keep in the freezer for emergencies. This is that emergency. And the authors of the following two papers will no doubt appreciate having your full–cool-headed–attention:

First, Bernd Scherer has a new paper entitled “An Integrated Approach to Sovereign Wealth Risk Management.” If this paper seems a lot like the last paper he did on SWF portfolio management, it’s because these papers are all part of a project at EDHEC Business School on Asset-Liability Management techniques for sovereign wealth fund management. Here’s an abstract:

“Sovereign wealth funds (SWFs) typically have no direct earmarked liabilities. Nor should they, as the financial asset they represent is only part of total sovereign assets, which in turn guarantee all sovereign liabilities. The objective of this paper is to incorporate the economic balance sheet of the sovereign sponsor into the optimal asset allocation problem of the SWF. This paper outlines an easy to implement solution that nests well in the literature on SWFs. We show that economic leverage will reduce speculative demand but leave hedging demand (against fluctuations in the net fiscal position of the sovereign state) unchanged. We also show how to extend our one-period methodology to a multi-period context by solving a dynamic stochastic programme. Allowing for optimal dynamic decision making increases the amount of equity risk an SWF can take. The advantage is greatest for large values of economic leverage. Finally, we conclude that narrow tactical asset allocation ranges limit the SWF’s ability to manage its risks.

Second, Christiana Ochoa and Patrick Keenan take aim at the IFC in a new paper entitled “The IFC’s New Africa, Latin America, And Caribbean Fund: Its Worrisome Start, And How To Fix It.” The paper offers some interesting details on the “ALAC Fund” and how it could be improved to maximize development impacts. Here are some relevant blurbs:

“The ALAC fund represents the fulfillment of World Bank president Robert Zoellick’s call for sovereign wealth funds to direct one percent of their investments to private enterprises in Africa. Zoellick argued that investments by sovereign funds, if done in partnership with the IFC, could help to transform the economies of many poor countries…It has the potential to substantially influence the nascent but important emerging market private equity industry for good or ill, depending on the kinds of investments it makes and the conditions associated with those investments.

Unfortunately the ALAC’s funds initial investments are not consistent with the principles that would make it a viable tool for accomplishing its dual goals: facilitating development and poverty reduction, and providing a return to investors…Based on its track record so far the ALAC fund must be considered a missed opportunity. But if the fund refocused its strategy to work directly with smaller, less politically dependent enterprises, and it began to search for and find investment targets not known to other investors, then it might fulfill its potential.”

And let’s not forget…

2 Responses to “Weekend Reading”

  1. 1 scott e. kalb July 25, 2011 at 12:15 am

    I believe the “ALAC Fund” paper may have missed the mark. The authors make some good points about the role of development assistance and private investment to help improve the welfare of people in poor countries but these are policy discussions of a wider nature better aimed at the World Bank and perhaps the IFC than the fund.

    The ALAC Fund is not an opaque policy fund but a transparent, private equity type fund based on commercial principles and founded to invest alongside the IFC and utilize its network as appropriate in Africa, the Caribbean and Latin America.

    The paper criticises but does not discuss the potential benefits of the fund, for example, providing a platform for many sovereign funds to initiate investments in these hard to access countries and to learn more about investing there. For the KIC, the ALAC fund represents a first foray into Africa and the Carribean. I can hardly think of a better partner than the IFC for us to get started with.

    The authors also draw conclusions about the current success and future prospects for the ALAC Fund based on limited information regarding its initial four investments. However, this is a rush to judgement. The authors do not have enough information to evaluate effectively these investments. Nor are these investments emblematic of anything; they represent less than 10% of total assets of the fund. This is a new venture. The ALAC Fund team is moving slowly and carefully to develop its model. Let’s give them a chance.

  2. 2 Ashby Monk July 25, 2011 at 7:50 am

    Thanks for the comment, Scott. And you make a good point; it’s probably too early to pass judgement on the ALAC fund.

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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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