Effects of US Currency Depreciation on Sovereign Wealth Funds
by Michael Maduell
As the US currency declines relative to the world’s currency many sovereign wealth funds are finding US companies rather inexpensive. Already many funds, such as the China Investment Corporation have taken significant stakes in US brand name financial institutions like Morgan Stanley, while other sovereign funds have invested in tech firms like Advance Micro Devices Inc (Mubadala). These seem like deals to the average sovereign investor who proclaims that their in it for the long run.
Since many central banks with large current account surpluses are now beginning to emulate portfolio managers, they are seeking to improve their asset allocation. Sovereign wealth funds are diversifying their portfolios into non-currencies to achieve higher returns rather than holding a depreciating US currency. According to the People’s Bank of China, they had around US$1.7 trillion in foreign reserves in December 2007. This gives the CIC a SWF to Foreign Exchange ratio of .12x (this leaves out SAFE and the Hong Kong Monetary Authority Investment Portfolio) which is low compared to the Abu Dhabi Investment Council’s ratio of 29.54. This ratio entails how large sovereign wealth funds are in size compared to foreign currency reserves.
The views in this publication are expressed by Michael Maduell.
US Public Opinion is Weary on Foreign Investment According to Survey
According to Public Strategies Inc, a polling firm, "A majority of American voters think investment by foreign governments in U.S. companies harms U.S. national security interests, and nearly half believe such investments harm the American economy, according to a new survey of the attitudes of U.S. voters toward sovereign-wealth funds.
The survey, conducted by Public Strategies, Inc., reveals that American voters are especially wary of U.S. investment by governments in the Middle East, Russia and China.
Nearly three in four voters -- 72% -- believe foreign governments don't
reveal enough about their investment portfolios.
Nearly as many, 68%, think that allowing foreign government investment
in U.S. companies gives foreign governments too much control over the
U.S. marketplace.
Solid majorities of American voters particularly oppose government
investment from Middle Eastern countries like Saudi Arabia (68%
oppose), Abu Dhabi (62%), and Kuwait (59%).
A majority of American voters also oppose investment by China, one of
the world's fastest-growing economies (65% oppose), as well as the
governments of Russia (61%), and Hong Kong (51%)..
The Sovereign Wealth Fund Institute is Seeking Volunteer Research Fellows for its Research Staff
We are looking for researchers to cover individual SWFs as Fund Analysts or contribute Special Research Studies.
These are volunteer fellowships. If you are interested in joining this innovative institution please send an email to:
volunteer@swfinstitute.org
Desired Skills & Credentials
Excellent Grammar & Writing Skills
Preferably masters/doctorate degree from a reputable university and/or industry experience
Diligent Research Skills
Foreign Language is a plus (Chinese/Arabic/Russian)
A strong desire to be part of a growing institution and have an impact on SWFs
Please include the following:
Resume
Contact Information
Cover letter
2/23/2008
EU plans to propose a voluntary code of conduct regarding transparency & governance
The Financial Times reports that, “The world’s sovereign wealth funds will be asked to accept a voluntary code of conduct governing their investment activities under proposals poised for approval next week by the European Commission. Peter Mandelson, the European trade commissioner, said the code would set out basic standards of governance and transparency for the funds.”
This sets the tone for a voluntary code rather than a statutory code. Question is how will the EU get the SWFs to adopt the code?
Source
2/22/2008
SWF Debate at the Council of Foreign Relations
Panelists
Stuart E. Eizenstat, Partner and Head of International Trade Practice, Covington and Burling LLP, Former Deputy Secretary Of The Treasury
Mohamed El-Erian, Co-Chief Executive Officer and Co-Chief Investment Officer, PIMCO
Simon Johnson, Economic Counselor and Director of the Research Department, International Monetary Fund
Alan Murray, Executive Editor, Online, Wall Street Journal
Daniel K. Tarullo, Professor, Georgetown University Law Center
2/19/2008
Japan ruling party to start looking into setting up sovereign wealth fund
AFP reports that, “Japan’s ruling Liberal Democratic Party will set up a task force this week to study the creation of a sovereign wealth fund for Asia’s largest economy, a party official said Tuesday. The team will be headed by former financial services minister Yuji Yamamoto, the official said, declining to be named. ‘We are going to set up the project team on Friday to discuss a sovereign wealth fund,’ the official said.”
2/19/2008
Do SWFs make smart equity purchases?
In the short term, probably not. Many experts agree that SWFs are long term investors.
2/19/2008
The Fading Line of Central Banks and Sovereign Wealth Funds
As Central Banks begin to diversify their holdings from foreign reserves into other asset classes such as bonds, equities, and real estate, they begin to take on more risk for return. This trend is especially true for central banks in developing economies, such as China, the Gulf States, and even possibly Brazil. Many of these SWFs are managed or heavily influenced by the Finance Committees from their respective governments.
Countries pondering SWFs with large reserves:
Foreign reserves in USD millions - Most recent reported figures
Japan - $ 973,365
India - $ 288,316
Brazil - $ 185,100
2/19/2008
French Economy Minister Ponders a SWF
According to the Independent, "Christine Lagarde, France's economy minister, may establish a French sovereign wealth fund to counter the rising power of the state-owned funds from the developed world.
In a debate on French television, Mme Largarde called the idea 'seductive' and said she was thinking of creating a French fund. Such a move would represent an astonishing volte face from the country that has been one of the harshest critics of SWFs, many of which are controlled by Middle East and Asian governments in the developing world and have become increasingly active in Europe and America. "
2/18/2008
Insider Trading Concerns for SWFs
A possible hindrance for the efficient market hypothesis, Sovereign Wealth Funds might have access to material non-public information through various governmental channels.
Linda Thomsen, Director of the SEC’s Division of Enforcement states “…sovereign wealth funds, like hedge funds, have, by virtue of their substantial assets, substantial power in our financial markets. However, in addition to this financial power, sovereign wealth funds, unlike hedge funds, have power derived from being governmental entities, which may give them access to government officials and information that is not available to other investors. There is the potential for these powerful market participants to obtain material non-public information, either by virtue of their financial and governmental powers or by use of those powers, to engage in illegal insider trading using that information.”
2/12/2008
New Research Fellow Joins SWF Institute - Conrad Metz
Let us formally welcome Conrad Metz who has more than 17 years of investment experience. He has decided to volunteer his insight and expertise to this non-profit organization as a research fellow.
Survey of Fund Managers say SWFs need to adopt a code, or increased transparency
According to the FT Alphaville, "A sneak peek at the latest Cantos City Panel, a survey of 185 fund managers and analysts, reveals that about 80% think that clearer guidance or an official code of conduct is needed for sovereign wealth funds. About a quarter opted for the hard line option of a code of conduct on behavior, while a further 54% want more clarity on transparency and governance but see no need for legislative action."
2/9/2008
Sovereign Wealth Transparency & Investment Strategy
The picture below illustrates the upper echelon of SWFs and their investment approach relative to transparency.
2/7/2008
Japan and other G-7 Nations calls for SWF Rules
As Sovereign Wealth Funds continue to grow in size, they are beginning to invest in resource rich equities. Most notably the China Development Bank, a government sponsored lender with a mandate to use money from the China Investment Corporation (CIC) has the ability to make foreign acquisitions.
Rio Tinto (ticker:RIO), a mining company based out of the UK with world wide operations might be in a bidding war with China as BHP Billiton is more aggressive in the prospective takeover.
Mr. Hajime Bada, President of the Japan Iron and Steel Federation says “we need governments everywhere to come together to make rules that would prevent the disorder caused by these funds. Some countries are using their state funds to dominate certain industries.”
2/5/2008
H.R. 556: Foreign Investment and National Security Act of 2007
From Congresspedia:
The National Security Foreign Investment Reform and Strengthened Transparency Act of 2007 was written less than one year after the Bush administration received criticism for allowing Dubai Ports World (a United Arab Emirates firm) to manage security at U.S. ports. The bill would direct the executive branch to review business transactions to determine their affect on national security. On February 28, 2007, the House passed the bill 423-0.
Read the bill at: FINSA
2/5/2008
Total Foreign Investment in US trumps US Investment Abroad
Despite critics of thinking neo-protectionism is upon the US Market, the trend of foreign investment in the US is still strong and out pacing US investment abroad. The United States has become the place where foreign investors continue to invest.
2/4/2008
Russia's New SWF: National Welfare Fund
The Moscow Times reporting that:
"Russia has made much of its natural wealth, boasting some $157 billion accumulated in the stabilization fund from excess oil revenues. As of Friday, the stabilization fund will be split into the Reserve Fund and the National Welfare Fund.
Russian finance minister Alexei Kudrin reiterated the government’s commitment to investing some of that wealth into financial markets.
The official in Kudrin’s ministry who was until recently in charge of the stabilization fund, Deputy Finance Minister Sergei Storchak, remains in pre-trial detention on fraud and embezzlement charges. Investors have expressed concern over Storchak’s continued detention, seeing in the case a possible threat to Kudrin’s position and to his policy of using the Stabilization Fund to hedge against drastic falls in global demand for oil and gas."
The National Welfare Fund will initially be invested very conservatively, with the following guidelines:
(i) All must be in foreign debt, denominated in USD, EUR or GBP, rated at least AA-, from Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands, Spain and the US.
(ii) At least 50% in foreign government debt, with the rest in foreign private/corporate debt.
(iii) Up to 30% in foreign agency debt and central bank debt.
(iv) Up to 15% in debt of international financial organizations (ADB, EIB, etc.).
(v) Up to 30% in foreign bank deposits.
2/1/2008
Democracy Index (Economist) with SWFs
More SWFs with ranked Authoritarian Regimes according the Democracy Index have larger SWFs than more Democracies, the exception seems to be Norway. Source is from The Economist Democracy Index
Sarkozy mentioned the phrase in his speech. More continental European countries are calling for changes in the advent of the growth of foreign ownership in their domestic equities. Bloomberg reports that, "The German government wants to keep hurdles for foreign investment low as it prepares new legislation to protect 'public order and security,' parliament said in its regular bulletin. The new rules will only apply to planned foreign purchases of 25 percent or more of a company's voting rights, according to the bulletin of the lower house of parliament in Berlin, known as the Bundestag. Foreign investments would only be blocked in an 'emergency,' the bulletin said today, adding the planned revamp is compatible with European Union rules."
2/1/2008
For Now Japan Government not looking at building a SWF
Reuters reports that, “Japanese Finance Minister Fukushiro Nukaga said on Friday that he has no plans to set up a government investment fund, or sovereign wealth fund, to manage foreign reserves, given risks of generating losses by managing foreign reserves aggressively. ‘At this moment I don’t think we will have a sovereign wealth fund,’ Nukaga told a news conference after a cabinet meeting.”
Jan 2008 News
According to the Independent, "Christine Lagarde, France's economy minister, may establish a French sovereign wealth fund to counter the rising power of the state-owned funds from the developed world.
In a debate on French television, Mme Largarde called the idea 'seductive' and said she was thinking of creating a French fund. Such a move would represent an astonishing volte face from the country that has been one of the harshest critics of SWFs, many of which are controlled by Middle East and Asian governments in the developing world and have become increasingly active in Europe and America. "
Sarkozy mentioned the phrase in his speech. More continental European countries are calling for changes in the advent of the growth of foreign ownership in their domestic equities. Bloomberg reports that, "The German government wants to keep hurdles for foreign investment low as it prepares new legislation to protect 'public order and security,' parliament said in its regular bulletin. The new rules will only apply to planned foreign purchases of 25 percent or more of a company's voting rights, according to the bulletin of the lower house of parliament in Berlin, known as the Bundestag. Foreign investments would only be blocked in an 'emergency,' the bulletin said today, adding the planned revamp is compatible with European Union rules."
