Archive for September, 2011

Weekend Watching

Ashby Monk

Gao Xiqing, President of China Investment Corporation, was on Charlie Rose this week. The 18 minute interview is well worth watching. Gao is a solid diplomat with a genuine and humble approach. He comes across very well, which is undoubtedly why he’s “the face of the CIC” in the West. Anyway, here are some of his main talking points:

On Europe: All the world’s economies are interconnected, but we have our own problems to deal with as well. China won’t bail out Europe. Sorry.

On Investment Restrictions: For starters, CIC has its own investment restrictions (no tobacco, gambling, or mass killing machines in its portfolio). And then there are the foreign government restrictions, which are sometimes reasonable (national security) and sometimes not (infrastructure and banking). On the latter, Gao noted that the West seems to treat China differently from other SWFs — i.e., CIC gets picked on by the West because it is sponsored by China.

US Leadership: After 2008, China stopped looking at the US financial system as a model. And, based on recent gridlock in the US political system, American democracy appears broken.

 Anyway, Gao’s views are interesting. Watch the interview here. Have a nice weekend!

The Daily Brief

Ashby Monk

Here are today’s top news items:

  • Japan’s Government Pension Investment Fund ($1.1 trillion) is ready to launch EM mandates.
  • The Nigerian Federal Government and State Governors are deadlocked over new SWF. This will have to be resolved by the Supreme Court.
  • ExxonMobil now is the next US company to be under investigation for its relationship with LIA.
  • Market volatility is already showing up in SWF returns: Alberta and New Zealand.

And here are the week’s top stories:

  • CalPERS’ Joe Dear says his fund will struggle to hit its investment target in the coming years. And he’s not the only one.
  • Japan puts the idea of a new sovereign fund back on the table.
  • Introducing Shariah-compliant infrastructure investing. Fascinating.
  • When it comes to M&A, it’s hard to top Temasek — the Singaporean fund has apparently done some 25 deals so far this year!
  • China and Iran are negotiating a $6 billion deal to build two refineries in Iran.
  • Investors are increasingly bullish on Africa.

Bill Gates ♥ SWFs

Ashby Monk 

As I’ve noted previously (e.g., here, here, and here), there is a growing interest in the role that sovereign funds can play (and have played) in facilitating economic growth in the developing world. The latest high-profile individual to gravitate to the idea of leveraging the capital in SWFs for development is none other than Bill Gates. In a “Technical Note on the Report of Bill Gates to the G20 on Financing for Development“, Gates’ thoughts on the value of SWFs for development are clear (see page 6 of the document). Here are some blurbs:

“…there is an opportunity to scale up their investment in poor countries’ infrastructure in a big way, beyond the helpful but limited initiatives so far, and provide a core of financing which will also bring in greater private sector investment.”

“An infrastructure fund financed by just one percent of SWF assets would start at $40 billion, and could reach $80-100 billion or more with projected growth over this decade.”

“There is a compelling reason to find smart ways to tap this pool of global savings for development, and especially for infrastructure as the backbone of growth and poverty reduction.”

So true, Bill. Unfortunately, there are many, many challenges to overcome, which is why these investors (who want to invest in infrastructure) aren’t investing in infrastructure. (Read this for details.) There are internal constraints (e.g., governance, human capital, risk management, etc.) and external (political risk, agency costs, commercial orientation of governments, etc.). It’s a hugely complex undertaking.

Ideally, I’d like to launch a multi-year project focusing on all aspects of this problem — from organizational design and financial management to project management — to develop real-world solutions that facilitate institutional investment in infrastructure in the developing world. That’s really why I came to Stanford University: To try to understand the constraints and challenges associated with unlocking these ever-growing pools of financial capital for the purpose of infrastructure investing!

Alas, funding is scarce these days, so my time often gets redirected to better-funded research projects. If only there was a philanthropic organization interested in this topic that could give big research grants of the scale required to figure out these intractable infrastructure issues…

The Daily Brief

Ashby Monk

  • CIC’s Jin Liqun had some interesting comments today about Europe and his fund’s operations.
  • Here’s a graphic highlighting how SWFs’ allocations have shifted recently.
  • Canada’s pension plans are shaking things up on a global scale.
  • Ireland is creating a strategic investment fund (called ‘NewERA‘) that will be managed by NTMA and work with the NPRF.
  • The secretive Brunei Investment Agency is big into hotel management. Just FYI.
  • Queensland Investment Corporation seems to be having some real success raising third-party funds.
  • CalPERS’ Joe Dear says his fund will struggle to hit its investment target in the coming years.
  • The Qatar Investment Authority’s boss reflects on the economic mess in Europe. It’s bad.
  • Cue violin: Blackstone boss complains about rising trend of SWF co-investment in private equity: ‘Amounts to a massive fee cut’. (Yeah, that’s the point.)

Frontier Finance: Hire Project Managers!

Ashby Monk

You’re running a large, public institutional investor out on the frontier of finance. You want and need to hire the best and brightest minds to help achieve your objectives, but you simply can’t locate the finance talent you need. What to do?

In my view — which has been greatly influenced by a mentor of mine at a sovereign fund operating out on the frontier — you should hire highly accomplished and skilled project managers and train them in the language of finance. Why? The successful portfolio manager at a sovereign fund or public pension fund looks an awful lot like a successful project manager in non-financial industries.

Here’s an (overly) simplified description of your job as a portfolio manager at a public investor: you’ve got a specific transaction you’re interested in doing. Perhaps you had the idea or perhaps your boss did. Whatever the case, you have a series of hurdles and challenges that you will have to overcome to close this transaction. There’s due diligence to do, risks to manage, internal priorities to consider, and high-level approvals to secure (e.g., legal, CRO, COO, CIO, CEO). In order to achieve all of this, you have limited resources at your disposal, which means you have to be very efficient in your work and effective in your coordination and collaboration.

Who do you think is right for this role? Is it the young finance whipper snapper out of the Ivy League or Oxbridge who’s been a trader on Wall Street for two years? Or is it the project manager that has a demonstrated ability to get things done? For large institutional investors, the choice (for me) is obvious: I’d rather have a project manager with little knowledge of finance than an investment professional with little project management experience — especially since all of these funds will have senior investment professionals (e.g., the CIO) that will ultimately have to bless any investment decisions.

So, given you’ve got the investment knowledge up high in the organization, why not hire project managers at the lower levels that can steer a project from start to finish? And how, you might be thinking, do you expect these funds to find these sorts of folks and hire them? My Stanford colleague Ray Levitt has an interesting take on this:

“The interviews should be designed to assess a prospective new hire’s temperament and skills for teamwork in a very unstructured environment vs. [ability] to assess their capacity for individual accomplishment that might be indicated by grades or prior technical performance evaluations. Some companies include bringing potential hires into social activities such as Friday afternoon happy hours as part of the hiring process.”

In other words, the nerd with the 4.0 GPA who dominated his or her financial math masters program is probably the wrong person for this particular role. However, the captain of a basketball team or crew team with a 3.3 GPA may be the perfect hire.

Why? Project managers have to be team players (most of what they do is coordinate and delegate). They also have to be disciplined and rigorous about getting things done. (Have you ever met a competitive rower?) They have to be able to nagivate bureaucracies, while internalizing and integrating innovative practices. (Do quants have the patience for this?) They have to be self-starters with a high pain threshold. (Again, see rowing). And, finally, they have to have a high tolerance for ambiguity.

Anyway, if I were running a large sovereign fund, I’d recruit an army of project managers and put them underneath the tutelage of a handful of savvy investors. Because if you can manage the site below, I trust you to be a good steward of my pension money. Also, financial concepts are quite teachable, while project management skill is often only developed through life experience.

The Daily Brief

Ashby Monk

  • Japan puts the idea of a new sovereign fund back on the table.
  • Introducing Shariah-compliant infrastructure investing. Fascinating.
  • KIC has decided to take a pass on more BofA equity.
  • Singapore is remarkable: 15.2% of households have over $1 million “under active management,” which means that house values aren’t counted in this statistic.
  • French CDC is interested in a new vehicle for seeding local hedge fund managers. I think it’s brill idea. If you do this right, you can get paid for letting hedge funds manage your money. (Obviously, if you do it wrong you can lose your money…)
  • When it comes to M&A, it’s hard to top Temasek — the Singaporean fund has apparently done some 25 deals so far this year!
  • GIC has some large, unrealized losses on its books.
  • Krugman on his colleagues: “models are only models” and “many economists aren’t even trying to get at the truth.”

To Preserve and Appreciate

Ashby Monk

Here’s something odd: I’ve come across some funds lately with mission statements that call for both capital preservation and capital appreciation.

Don’t the boards that write these statements realize that these two concepts are diametrically opposed to one another? Don’t they realize that the portfolio that will achieve the former won’t achieve the latter? Apparently not.

As I see it, the only way to achieve both of these objectives from an investment strategy / risk budget approach is to split the fund up into two separate units with their own strategies and profiles.

However, even then, that would probably require two separate mission statements to guide the behavior of staff. After all, one of the touchstones of good governance is clarity of mission — without this it’s really hard to align the interests of the staff with the organization as a whole.

Anyway, Board members, to preserve and appreciate is akin to eating cake and having cake. You can’t do both. Rewrite your missions accordingly.


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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