Archive for November, 2011

Deep Thoughts by Ewart Williams

Ashby Monk

Asian Investor has published an interview with Ewart Williams, a Member of the Board of Governors for Trinidad and Tobago’s Heritage and Stabilisation Fund (H&SF). In case you aren’t familiar with Mr Williams, he’s a rather interesting guy. He spent 30 years working for the IMF before being appointed T&T’s Central Bank Governor in 2002 and then again in 2007. Today he works for the $4 billion H&SF and, in addition, has played a role within the International Forum of SWFs and helped to develop the Santiago principles. In short, he has useful insights on running a SWF and on the international initiatives currently underway on SWF governance. So, without further ado, here are some deep thoughts by Ewart Williams:

On the motivation for setting up the H&SF: “We had frittered away resources after the first two oil booms. When oil prices fell the economy went into a serious recession. When oil prices started to recover again, the government was committed to putting away resources. We started with an interim revenue stabilisation fund and then the Heritage and Stabilisation Fund was formally put into law in 2007…My career with the IMF made me painfully aware that, particularly with oil and gas as a wasting asset, it was important to put funds aside for future generations and make sure they are invested wisely.”

On the impact of the IWG and International Forum: “There is more information available now than there was before the body was set up. The rules of the game are much clearer than they were before…Now the next step is to formalise the group with a secretariat. That is something that will be considered. As of now the IMF acts as a sort of secretariat. The next step is also in ensuring compliance with the Santiago Principles.”

On Santiago Principles Compliance: “Most want to adhere. But the fact is that you are dealing with different political systems where governance means different things. Governance in Trinidad and Tobago or in some European countries such as Norway is different from what it is in many of the Middle Eastern countries. Therefore one has to find common ground between different political systems and that’s not easy. And what the Santiago Principles have done is to find that minimum common ground. The challenge is getting compliance to those principles.”

The Daily Brief

Ashby Monk

And now, the news:

  • Oil exports from GCC countries could generate $608 billion in income for 2011, which is $143 billion more than in 2010. Much of this will wind up in SWF coffers.
  • Temasek is putting close to a billion dollars into a building project in the western Chinese city of Chongqing.
  • Samruk-Kazyna is hoping that it can save Kazakhstan’s third largest bank, BTA. The former now owns over 80% of the latter.
  • Fitch has affirmed Mubadala’s AA rating.
  • And, in the spirit of healthy competition, the SWF Initiative at Tufts and Fletcher has a new SWF Bulletin they’ll be doing every month. It looks quite interesting. So check it out.

The Impact of SWFs

Ashby Monk

With so many new sovereign funds popping up around the world, I think it’s fair and opportune to ask a simple question: What benefit(s) do sponsoring countries receive from their SWFs? I’ve had a few thoughts on this topic (see here, here and here for some examples), but a new report by PwC is really quite insightful in this regard. The report — entitled ‘The impact of Sovereign Wealth Funds on economic success‘ —  catalogues the effects that a SWF has on the economy of the sponsoring country. Here’s a blurb:

“To understand whether a Fund has a material impact on the host economy…we analysed the historic performance of 51 countries over 30 years. The countries selected either had a Sovereign Wealth Fund, or had the potential to have a fund, thanks to significant commodity income or trade surpluses over the period. Comparing the two groups enabled us to see how their relative performance had varied over time and helped us isolate the fund’s impact.”

And what do they find? Here are the key findings lifted from the report:

  • “Setting up a Sovereign Wealth Fund may help to reduce inflation – the presence of a fund is linked to lower inflation, even when we account for a number of other factors likely to affect inflation, such as monetary policy stance, the state of the labour market and the current account balance. This result is stronger for commodity rich countries than for those with a non-commodity based trade surplus.
  • Exchange rate appreciation may be lessened by a Sovereign Wealth Fund – in countries with floating exchange rates we found a relationship between the presence of a Sovereign Wealth Fund and a weaker exchange rate. The effect was equally strong for countries with and without commodity wealth. This may occur because monies can be held in foreign currencies (often in US dollars), so not bidding up the value of the local currency.
  • Sovereign Wealth Funds may help improve transparency in an economy– our analysis found levels of transparency to be correlated with measures of economic development such as GDP per capita and the depth of financial markets. Even when these factors are taken into account, however, we see lower levels of perceived corruption in countries where a Fund is present. The effect appears slightly stronger in countries with non-commodity based trade surpluses.”

In short, a SWF helps to control inflation, manage exchange rates, improve transparency, and minimize corruption. I find that fascinating.

The Daily Brief

Ashby Monk

Some interesting news out today:

  • NZSF is defending its responsible investment policies after revelations of an exposure to a West Papuan mine.
  • The China Development Bank is starting to look and feel a lot like a SWF.
  • TIAA-CREF spent half a million dollars on lobbyists in single quarter. Is this normal behavior for a pension fund?
  • Investors are increasingly interested in Africa. (Me too.)
  • CIC has signed up to a new JV with Blackstone and Greentown Property to build retirement and holiday homes in China.
  • Japanese pensions are finally trying to break their home bias.

Dear Pension: Can You Please Pay For My Infrastructure?

Ashby Monk

We knew this day was coming. Western governments have finally come to recognize that they: 1) are broke; 2) are unable to repair (or build) their dilapidated (or non-existent) infrastructure; 3) are looking for ways to spur domestic growth (i.e., by investing in infra); and 4) are increasingly keen to tap into the $70 trillion sitting in the world’s institutional investors. Here are some of the most recent examples:

So perhaps we’ll finally see the massive wave of privatization of infrastructure assets that some have been expecting? No doubt the pension funds would be quite keen on this, as they like the asset class (for a variety of reasons). Indeed, all the people rattling on about ‘win-win‘ situations with respect to infrastructure needs and pensions’ interest in infrastructure…are right!

But, sadly, that doesn’t mean investors will jump at any of these new opportunities to invest in infrastructure. Why? Because the problem isn’t the appetite these funds have for the asset — the problem is a lack of viable and effective ways to access the asset class. Put simply, there is no easy mechanism (for now) that allows long-term investors to invest in infrastructure in a fully aligned and cost-effective way. It simply doesn’t exist.

Even the new Osborne plan in the UK seems a but murky on the issue of access; the news articles I saw simply said that the country would try to unlock pension assets for infrastructure in the same way the Canadians have done. For real? So does that mean we can expect the UK to help their pension funds develop large in-house teams with high levels of expertise (and high salaries) in order to make direct investments? Because if this isn’t the plan, then the UK’s not really doing what the Canadians did.

Anyway, whatever the case, this is a step in the right direction. But ultimately this discussion will have to be redirected towards the mechanisms to facilitate “easy and direct access”. Stay tuned.

The Daily Brief

Ashby Monk

Good morning, Stanford. Let’s get right to the news, shall we:

  • The UK has announced a new plan to help boost infrastructure investment that requires the (very willing) involvement of UK pensions.
  • The UK’s new infrastructure policy helps to explain why the China Investment Corp turned to the FT’s opinion page Sunday to convey its interest in investing in UK infrastructure. Until the UK announcement the following day, there was quite a bit of head scratching happening.
  • The QIA has signed up to a $2 billion joint venture with Morocco to fund major development projects in the North African economy.
  • In addition to the JV above, Qatar Holding, the Kuwait Investment Authority’s Al Ajial Investments, and Abu Dhabi’s Aabar recently agreed to partner with Morocco’s Fund for the Development of Tourism in the creation of a new $2.5 billion investment vehicle called Wessal Capital.
  • Torontonians can relax: Ontario Teachers’ isn’t selling the Maple Leafs to a US private equity firm…for now.

Thanksgiving Reading

Ashby Monk

It’s Thanksgiving here in the US of A, which means two things. First,  it means there are decorative gourds aplenty on tables and doors across the country. And, second, it means we’ve got four straight days of friends, family, food, and football. It’s awesome. So, I’m taking a break from the blog until Monday.

However, for those readers who have come to expect (or even need) a daily dose (fix) of SWF news and analysis, I’m not going to leave you hanging. Here’s a four day supply of SWF research:

  1. Michael Fini has a new paper entitled “Financial Ideas, Political Constraints: Sovereign Wealth Funds and Domestic Governance.”
  2. Thorvaldur Gylfason has a new paper “Natural Resource Endowment: A Mixed Blessing?
  3. April M. Knill, Bong Soo Lee, and Nathan Mauck have published a new paper entitled “Sovereign wealth fund investment and the return-to-risk performance of target firms.”
  4. Yelena Kalyuzhnova has published a new paper entitled “The National Fund of the Republic of Kazakhstan (NFRK): From accumulation to stress-test to global future.”

Happy Thanksgiving!


About

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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