Sovereign and Public Investor Topics: Asset Allocation and Policy
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Sovereign Wealth Themes: The Sun Never Sets on Sovereign Wealth II

sovereign wealth fund reportThis brief 3-page report is available for download for SWFI subscribers. This report gives a concise overview on the proliferation of sovereign wealth funds.


April 2014 – The Sun Never Sets on Sovereign Wealth II

The financial economy has become more complex and interconnected, especially with the proliferation of sovereign wealth funds, rivaling other asset owners in size and sophistication. For example, according to the Investment Company Institute, the size of U.S. defined benefit public plans amounted to US$ 5.6 billion from December 2013. As of April 2014, sovereign wealth funds as an investor class totals US$ 6.4 trillion.

Part II – Sample
Sovereign wealth funds can be economic anchors for a society. The reason why many sovereign wealth funds are created and maintained is economic in nature. Countries fearful of Dutch Disease, hastened the use of overseas investment vehicles to sterilize natural resource government inflows. Sovereign wealth funds can have a strong fiscal stabilizing influence as well.

Alabama SWF Seeks International Equity Manager

The Alabama Trust Fund doled out an RFP looking to hire an active international equity manager to manage US$ 100 million. The allocation could be either a separate account or with commingled managers. According to the RFP, the manager must have experience managing international equity portfolios for at least three years and have a minimum of US$ 1 billion in assets toward international equity portfolios.

With a 24% allocation to international equity, the fund currently has these external managers running that portion – according to its investment consultant, Callan Associates:

  • Batterymarch Financial Management
  • GMO
  • Thornburg Investment Management
  • Wells Fargo

The trust fund is funded by Alabama’s oil and gas royalties. Alabama’s State Oil and Gas Board provided information to the Treasurer mentioning that production is expected to continue to decline.

Mubadala Shifts Focus from Emerging Markets

emerging markets sovereign wealth funds

Mubadala Development Company is altering its course from emerging markets to developed markets, its Deputy CEO Waleed al Muhairi told Reuters on February 25th. The Abu Dhabi state-owned investment vehicle had turned its attention to emerging markets as the United States and Europe were battered by financial crises. Public stocks in emerging markets had a challenging 2013. The Federal Reserve is expected to pullback on asset purchases. The sovereign wealth executive stated the fund will begin widening its footprint in markets with long-term potential in 2014.

“We’re of course looking at emerging markets, but also to markets like the U.S. and Europe in particular, as recession is being replaced by signs of recovery,” he said.

Mubadala had US$ 55.5 billion in assets under management as of June 2013. Its European portfolio currently consists of renewables (United Kingdom, Germany and Spain), semiconductors (Germany) and aerospace technology (Switzerland and Italy).

In the United States, Mubadala has existing investments in information and communications technology (Prodea Systems and Damballa), real estate (Viceroy Hotel Group) and semiconductors (Global Foundries). The sovereign fund also holds shares in General Electric, Advanced Micro Devices, The Carlyle Group, EMI Music Publishing, John Buck Company, The Raine Group LLC, and Related Companies.

See the Main Reason Why Norway’s Sovereign Wealth Fund Likes Equities

The US$ 838 billion sovereign fund had a 26.28% return in its equity portfolio versus a 0.1% return in the fixed income portfolio. In total, the sovereign fund posted a 15.9% return in 2013.

In recent news, the mega sovereign fund became a net seller of stocks to comply with its limit on public equity holdings. 150 billion kroner worth of stock was sold (~US$ 25 billion) in the fourth quarter of 2013.

Norway’s sovereign wealth fund is managed by Norges Bank Investment Management.

Investment Returns -Asset Class – Norges Bank Investment Management

Year Equity Portfolio Returns (%) Fixed Income Portfolio Returns (%)
1999 34.81 -0.99
2000 -5.82 8.41
2001 -14.6 5.04
2002 -24.39 9.9
2003 22.84 5.26
2004 13 6.1
2005 22.49 3.82
2006 17.04 1.93
2007 6.82 2.96
2008 -40.71 -0.54
2009 34.27 12.49
2010 13.34 4.11
2011 -8.84 7.03
2012 18.06 6.68
2013 26.28 0.1


Click to Enlarge

>> See how the sovereign fund’s fixed income asset class performed?[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Are Sovereign Funds Correctly Assessing Risk in Their Illiquid Portfolio

illiquidity premium

Asset-heavy sovereign wealth funds and public pensions are widely recognized for holding a considerable amount of illiquid assets, particularly in private equity and real estate. For example, the California Public Employees’ Retirement System in October 2013, held 20% in private equity and real estate. The California pension goliath is attempting to unwind a portion of these assets and reduce the number of manager relationships. Across the Pacific, Singapore’s GIC has a band average of 25% targeted to private equity and real estate in their policy portfolio. The GIC is also periodically involved in taking hefty stakes in companies via private placement. Higher typical returns coupled with these public investors’ long-term investment horizons, on the surface, seem to make sense. However, there are hidden costs of holding a large illiquid portfolio.

A deadly outcome of a liquidity crunch is a fire sale – a board’s worst nightmare.

Bailout Fund – Ireland’s Experiment

Future unexpected liquidations can be a monstrous cost if the illiquidity premium is not properly priced through various stress tests. A distinct amount of sovereign funds explicitly do not have the types of liabilities pensions’ possess. In times of economic crisis, national governments may call upon sovereign wealth for monetary assistance. For example, during the global financial crisis of 2007, the Irish National Pensions Reserve Fund (NPRF) was used as a policy tool to bailout two noteworthy Irish banks, Allied Irish Banks and the Bank of Ireland. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Future Fund Returns 17.2 Percent for 2013

Australia’s Future Fund returned 17.2% from the 12 months ending on December 31, 2013 – beating the benchmark target return of 6.8%. At the start of 2013, the Future Fund’s chief investment officer, David Neal, wanted a major shift of investment away from fixed income, toward equities.

In a press release, outgoing managing director, Mark Burgess stated, “Over the last year we have positioned the Fund to benefit from the market strength that has flowed from global policy efforts to lift economic activity. The portfolio has continued to perform well generating strong returns.”

Burgess mentioned in a recent teleconference that the high rate of return will be difficult to extract in the future. He added, “Many of the factors behind it are already priced into the asset classes.”

Peter Costello

Peter Costello, the former treasurer, has been appointed chairman of the Future Fund after David Gonski departs to take the chairman role at ANZ Bank. Costello has been a member of the board of guardians since 2009.

Gao and other Sovereign Funds in Davos

Some sovereign wealth funds and mega pensions have converged on Davos, the Swiss city where the World Economic Forum is held. Bahrain’s Mumtalakat Holdings, a frequent Davos delegate sender, had their CEO Mahmood al-Kooheji representing Bahrain. Kooheji gave an optimistic update on Gulf Air citing layoffs and restructuring changes. In addition, Kooheji told Reuters reporters in Davos, “This year we will be more active in investments……. We are looking across the globe and open for investments in all sectors except aviation and real estate. We’re very active in the broader ICT (information and communications technology) space and hope to do some acquisitions there.”

Another visitor to Davos is Gao Xiqing who has retired from the China Investment Corporation. China was a major theme in Davos and the reforms being swept in to balance trade versus domestic consumption. In fact, eight sessions focused on sustainable growth in mainland China. Similar to last year at Davos, economists like Nouriel Roubini, founder of Roubini Global Economics, predicts Chinese growth to slow down.

Government officials from Georgia made a Davos appearance including Georgian Prime Minister Irakli Garibashvili . He told reporters, “Georgia lacked long-term capital, this is why we will start a new sovereign wealth fund in February and are planning new infrastructure projects.”

Some attendees on the institutional investors’ side happen to be on the Sovereign Wealth Fund Institute’s Public Investor 100 ranking for 2013. Other major Asian institutional investors include GIC Private Limited who sent group president Lim Siong Guan. The Kuwait Investment Authority sent managing director, Bader M. Al Sa’ad. Shahmar Movsumov, executive director of the State Oil Fund of Azerbaijan, also made an appearance.

Other mentions include CPPIB’s Mark Wiseman, Yngve Slyngstad and Choi Kwang.

BizAsia’s Martina Fuchs Speaks with Mr. Gao Xiqing

Texas Teachers’ Assets Hit $119.7 Billion at September Close

According to a trustees’ meeting report, the Austin-based Teacher Retirement System of Texas had assets grow 3.7% to US$ 119.7 billion in the quarter ending on September 30, 2013. In the third quarter, the pension system earned 4.4% and outperformed its benchmark by 16 basis points. U.S. stocks (especially small-cap) and private equity were major contributors of return increases.

Increasingly, larger U.S. pensions are negotiating fees with long-only equity asset managers. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Brief Peak Inside the SAFE

What started as a small operation during the Asian Financial Crisis of 1997 now reverberates across capital markets and asset classes. The SAFE Investment Company invests money on behalf of China’s State Administration of Foreign Exchange (SAFE). China’s explosive growth over the last decade has filled the SAFE with foreign reserves, surpassing Japan’s massive pool of U.S. treasuries. As of October 2013, China’s foreign exchange reserves increased to US$ 3.66 trillion. China’s wealth is viewed by some government officials with conservatism and is described as xue han qian or “blood-sweat money” on the backs of Chinese workers.

China’s Foreign Reserves (Click to Enlarge Image) – Billions USD
Source: State Administration of Foreign Exchange

An ancient Chinese proverb, 富 不过三代 or fu bu guo san dai, essentially means, “wealth does not pass three generations.”

If one were to read more deeply into the Eastern adage, it can be interpreted like so: The first generation destroys the initial wealth; the second generation sacrifices and works hard, and the third generation learns to save – and the cycle repeats. The Chinese government went through three decades of transforming the country into a manufacturing powerhouse. In the context of the proverb, the Chinese have entered the “third generation.”

The 2007 shocks from the global financial crisis and Western banks’ massive deployment of stimulus measures have created a flood of inflationary currency in international markets. In addition, interest rates of U.S. treasuries plummeted. In 2007, officials at SAFE reacted; they moved their strategy to embark on diversifying into equities, specifically large cap stocks. They weren’t content to simply move capital into different asset classes, SAFE moved capital into different geographic markets such as Spanish bonds.

Investment managers at SAFE have held a long-term view of equity markets. Growing bold and opportunistic, SAFE’s managers predicted that the market drops of 2008 would trend upwards in the long-run. Not all market dislocations and opportunities were positive. SAFE opted to dip their toes into private equity and trust private equity firm TPG Capital to safely manage their capital. SAFE invested US$ 2.5 billion into a fund managed by TPG which invested in the now-failed Washington Mutual. Co-founded by David Bonderman, TPG later admitted their fifth fund was a mess.

Zhu’s Appointment[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Princeton University Endowment Returns 11.7%

David Lee

David Lee

The US$ 18 billion Princeton endowment recently boasted an 11.7% return in the fiscal year ending June 30, 2013. The 10-year annualized return ending on that date was 10.2 %.

Princeton University Provost David Lee noted that the large endowment would help benefit students through financial aid and scholarship funding. According to Lee, Princeton’s “scholarship budget has grown to $121.4 million this year.” That’s about US$ 6 million more than the university spent on scholarships last year, according to tax filings made by the university.

According to the university’s website and tax filings, during the 2012/2013 school year, roughly 4,400 undergraduate students received tuition scholarships totaling US$ 110 million, or US$ 25,000 per recipient. Tuition for Princeton runs US$ 40,000 per annum.

The endowment aims to spend between 4-5.75% of the endowment per year. The report noted that Princeton’s spending was well within those parameters.
Princeton doesn’t disclose specific holdings in its fund, but an announcement over the summer confirmed that the endowment didn’t hold any “direct” interests in weapon manufacturers. The announcement was made in response to a petition filed by university professors calling for a divestment of stock in such companies.

Reflections with CEO/CIO of bcIMC, Doug Pearce

Doug Pearce

Doug Pearce, CEO/CIO, bcIMC

On August 27, 2013, The British Columbia Investment Management Corporation (bcIMC) issued a press release announcing the retirement of its CEO/CIO, Doug Pearce, after a 25-year tenure with the public investor. Mr. Pearce granted the Sovereign Wealth Fund Institute an interview outlining his role over the years and how he’s seen the asset management industry change since he began 37 years ago. The bcIMC is a major Canadian public investor – see rankings here.

The Sovereign Wealth Fund Institute asked Mr. Pearce how his views on asset management have evolved during the 25 years the bcIMC has ballooned from a C$ 15.9 billion fund to just over C$ 102 billion.

Mr. Pearce responded first with a correction. “Actually, that 15.9 number we’ve been using for the press isn’t quite right,” he said. “The number was closer to C$ 9 billion.” He then continued by detailing the fund’s conservative roots. “When we started in ’88 we were invested in Canadian bonds and the Canadian money market exclusively. Starting quite early, we worked on getting legislation to start allocating to equities and real estate. That began in 1989, and we implemented it in 1990.”

Another major change, he noted, was transitioning out of purely Canadian investments and developing a more global portfolio. Whereas the fund started at 100% Canadian investments, it has moved to 60% Canadian and 40% ex-Canada with a 50/50 split on the horizon.

Mr. Pearce sees a challenging investment environment ahead, noting that the “tailwinds of declining interest rates since 1981″ have helped bcIMC best its benchmark. He sees the low return environment compounded with an inevitable rise in interest rates as “great possible headwinds.”

Another challenge Mr. Pearce sees isn’t directly linked to investments, per se, but policy and the general public’s opinion. He clarified by saying, “The general public doesn’t really understand the value of long-term capital. They get caught up in quarterly returns when we really should be looking at 10, 15, 20 year investment horizons [for public investors].” A number of the largest sovereign wealth funds report only on a 5, 10, and 20-year basis publicly.

He also mentioned special interest groups leading cries against the cost of defined benefit plans. He laments that there isn’t enough community outreach to explain that the investments these funds make in Canadian businesses directly helps the people so opposed to their dealings. “Some of the businesses we support, like TimberWest [a privately managed forest landowner], pay wages and support communities; when the employees retire, they’ll also have a pension benefit waiting for them.”[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

CalSTRS to Decrease Fixed Income and Public Equity Allocations



The investment committee of the California State Teachers’ Retirement System (CalSTRS) today voted on enabling modifications to their long-term asset allocation targets. The US$ 170 billion pension giant reduces global equity from 53% to 51% and fixed income from 20% to 16%. Illiquid asset classes such as institutional real estate and private equity had small increases. The inflation-sensitive asset class has a long-term target of 6% set by the investment committee – implementation in this asset class will be handled with patience. The changes in asset allocation would be phased in over a 2.5 year period.

“These are studies we conduct every three years and this was a critically important one, examining the effectiveness of our response to the global financial crisis of 2008-09,” said CalSTRS Investment Committee Vice-Chair Sharon Hendricks in a CalSTRS press release. “This study was invaluable in familiarizing our board members with the elements and dynamics of our portfolio. Our examination of the market allows us to adapt and to coax consistent long-term growth from a chaotic environment.”

Christopher Ailman, the chief investment officer of CalSTRS, is ranked #31 on the Public Investor 100.

New Asset Allocation Targets for CalSTRS – September 2013

Asset Class Current Targets New Long-Term Targets
Global Equity 53.00% 51.00%
Fixed Income 20.00% 16.00%
Real Estate 12.00% 13.00%
Private Equity 12.00% 13.00%
Cash 1.00% 1.00%
Inflation Sensitive 2.00% 6.00%
Absolute Return (formerly Overlay) 0.00% 0.00%

Source: CalSTRS

Deep Dive with Damon Krytzer, Trustee, the City of San Jose Police and Fire Retirement Plan

Damon Krytzer

Damon Krytzer

This interview will appear in the 3Q Y2013 (October 2013) issue of the Sovereign Wealth Quarterly. Damon Krytzer is #35 on the Public Investor 100. It is a ranking of the 100 most significant and impactful public investor executives of 2013.

This is a Deep Dive with Damon Krytzer, Trustee, the City of San Jose Police and Fire Retirement Plan.

Damon Krytzer is a senior consultant with Park Alpha. To learn more about consulting opportunities, please contact

1. Regarding asset allocation, given today’s investment climate what are some key points that public investors such as sovereign wealth funds and public pension funds need to keep in mind?

First that the assumptions used in portfolio construction are much more dynamic than those used in developing the strategic allocation; specifically cross-asset correlations and volatilities of reference asset classes. It is also important to consider that returns are not normally distributed. There are many ways for an investment to reach a long-term return number. Some assets or managers reach that with consistent returns and small tracking error, while others have very fat tails – fewer big years and some large drawdowns. Ultimately the same number, but extremely different investor experience. Frankly neither is right or wrong in itself, but the portfolio construction process, especially within sub-asset classes such as structured credit for instance, must blend sources of return to reduce the overall portfolio volatility.

2. What is one of the most important points you’ve learned as a trustee at the San Jose Police & Fire Retirement Plan when it comes to making investment-related decisions?

That in light of the extremely high transparency of our portfolio it is critical to communicate with the public often, and in terms that are understandable to an audience wide in sophistication level. We of course base decisions on probabilities rather than on certainty. Sometimes outcomes are on the wrong side of these probabilities, or may take multiple reporting periods to work out. At these times, we must be consistent in communicating, and must assume that our reporting can easily be shown out of context in the media. This of course works in both directions when our timing is simply spot on, or just plain lucky as well. Sometimes the weatherman says that it is likely to rain, but there is nothing but sun all day. Again, decisions based on probabilities and past heuristics are just that, and need to be discussed in this context.

3. With regard to recent asset-liability studies, should public investors begin a more tactical approach or stick to the long-term strategic plan?

At the total portfolio level, long term decisions are quite important assuming that they express well-defined goals set out in the IPS. It may be a spending policy, or a pension obligation, or simply a return target. In most cases this should be the focus of the policy allocation. That said – creating rules from which to operate a tactical decision-making process are critical as well since the world is extremely dynamic. To me, tactical decisions, at least in the pension context, are not return seeking but rather should be in place to smooth the volatility of our assets in light of our liabilities. They may be defined by a risk budget assuming the fund has a strong risk reporting process, or may be tactical based on other factors. On the other hand, within asset classes there is more room for alpha opportunities. In credit for instance, managing allocations to and from opportunity sets such as RMBS or spread products are effective because they are highly specialized. In hedge funds, assuming you consider that to be an asset class in itself, increasing allocations to CTA’s or multi-strategies would be tactical alpha examples.

4. What massive risks are not being taken seriously enough by public funds?

How quickly movements in volatility can be expressed in seemingly steady assets. A large volatility spike can effect asset pricing, market perceptions, and unfortunately cannot be hedged through diversification as we witnessed during the big risk on-risk off swings a few years ago. There is an active movement to rely on strategies like risk parity or convex investment programs to inherently respond to this type of spike, regardless of the root cause. This is of course appealing since the structure can be explained, and my statement isn’t a judgment on these strategies, but I fear that it is luring many market participants into a false sense of security – not only in the volatility exposures, but also in uncompensated risks such as the recent increase in interest rates. We saw in some cases a 4% decline in risk parity strategies with a 40bps increase in rates, and this risk is not one that adds to the returns otherwise.

clouds5. What safe havens exist to public investors when navigating through today’s regulations and policies?

I don’t think there is a single safe haven. We make decisions to meet our fiduciary duty, but with the speed of regulatory changes in today’s environment, and the actual and perceived funding gaps that exist, nothing is a given. Rather, we do have a defense in the courts. When we are considering the impact of a regulation or a measure, our first instinct is to ask the courts for direction. Our first job is to manage assets in the most appropriate way for our constituents. That said – we must do so within an ever changing regulatory environment that often conflicts with itself. Our choice is to turn to the courts for these decisions where appropriate and to focus our opinions within the scope of our appointed task.

6. Throughout the last couple of years, you’ve had the opportunity to meet with some of the most renowned public investors in the world and listen to their presentations. Are there any re-occurring themes that challenge the global market?

The challenges aren’t so much about the global markets, but I do see recurring themes about how to access and compensate for alpha. On one hand we have the notion of Smart Beta; a rules-based blend of active and passive management. This could include timing, or diversification rules through a correlation budget, or as a regime-oriented weighting scheme for example. Institutions have paid for this through alpha performance fees in the past but some asset owners are building these rules internally as directed beta. Another theme is to invest with a focus on risk factors, and in effect to think in terms of the economic regime rather than in diversification between asset classes in themselves. This is a work in progress, but I do like the trend in thinking about investing based on risk and return drivers in the context of economic assumptions.

7. At the Institute Fund Summit held in Frankfurt this October, we will be hosting quite a few central bank governors discussing the situation in Europe, is there anything in particular you hope they discuss while you are there – and why?

There is of course an inherent difference in how the U.S., Asia and Europe have addressed the so called crisis. Our timeframe is frankly too short to accurately judge which program is more effective, although there are many lingering issues that remain in Europe both on balance sheet quality and on economic growth that I hope to hear addressed. In particular, I would like to hear perspectives on where growth will come from, and whether individual decision makers are weighting growth as a tool to recovery versus as a consequence of other systemic measures.

8. What can Europe learn from the rest of the world?

This is something that we continue to debate in this country as well; that growth is a critical component of a sustained recovery. Yes, it is important to sure-up balance sheets and to deal with systemic issues, but without wage increases and incentives for growth you likely end up with a weakened economy well into the future. It seems that Asia is the other extreme in some ways, focusing attention on growth initially, and now forced to address asset quality, social safety nets and other structural issues at a very rushed pace. It is an exciting time to work in the financial markets right now.

9. Recently, African countries seem to be rising up in the sovereign wealth environment; any words of insight could you offer to a future wealth fund or a newly established fund?

For there to be a focus on governance and sound decision making process early on. These issues are critical in the sustainable success of an investment program for so many reasons, and extremely difficult to change down the road.

About Damon Krytzer

Damon Krytzer is a senior consultant at Park Alpha and has been involved in the global capital markets for 18 years, with experience in asset management and trade execution. Damon ran a global tactical asset allocation portfolio, founded a trading desk to manage concentrated equity transactions, and managed a pool of emerging markets rates and currencies. Damon’s professional experience includes roles with Oppenheimer & Company, UBS Financial Services and Prudential Securities.

Damon is active in advising board trustees on alternative investments portfolio construction. In addition to his role at Park Alpha and Waverly Advisors, Damon serves on the boards for The City of San Jose Police and Fire Retirement Plan, R2 Alpha Fund Management, a private equity portfolio investing in infrastructure, and ERNY Financial, developing products to invest in earnings rather than equity share price. He is a CFA Charterholder, adjunct professor for alternative investments at the University of San Francisco Business School, holds MBA degrees from Columbia Business School and the University of California Haas School of Business, and studied political science at Rutgers University.

A Norway with Two Sovereign Wealth Funds

lakeNorwegian elections are creeping up in what could impact the realm of sovereign wealth funds. Norway’s Conservative Party leader Erna Solberg has a chance of winning as polls suggest the opposition may win parliamentary elections. Politicians often develop economic policies; Erna Solberg seeks to fully review Norway’s Government Pension Fund Global (GPFG) if she wins. One floated idea is splitting up Norway’s sovereign wealth fund. Conservative politicians in Norway contend creating competition among domestic public funds is a good thing. In fact, many countries have more than one sovereign wealth fund or major public pension investor – examples include China, Singapore (GIC and Temasek Holdings), and the Gulf countries. Each sovereign fund could have a separate purpose or goal.

It is competition of public fund performance versus economies of scale.

The ruling party argues that splitting the fund to increase competition would increase risk taking that would focus on short-term results. Splitting the mega fund would increase administrative costs in the aggregate. Not to mention, many policymakers globally look up to Norway’s sovereign fund as a model. Norway’s GPFG operates a relatively low-cost operation compared to other pension investors. 2012 was the sovereign fund’s number #2 year. The fund also made substantial changes in their bond policy and increased diversification out of Europe.

A third way would be to allow Norway’s sovereign wealth fund to invest in other asset classes like infrastructure and renewable energy (preference of Norway’s Progress Party).

GIC Private Limited Embarks on a New Framework for Investing

Lim Siong Guan, Group President of GIC Private Limited

Lim Siong Guan, Group President of GIC Private Limited

In 2012, Singapore’s GIC traversed on a path to analyze their investment framework. The underlying mission was how the Singapore sovereign fund could maintain to reap long-term real returns in a complex investment world. Certainly, the global financial crisis weighed in on their decision to change their beliefs and philosophy on investing. Taking a step back, during the first two decades of the GIC’s existence, the sovereign wealth fund focused on liquidity. With the Cold War still intact, the fund was relatively conservative compared to many public pensions. In the 2000s, the GIC had amassed enough sovereign wealth to increase their risk tolerance. Looking abroad, they chose to embrace the endowment model of investing. Even though they never achieved a total allocation copy like David Swensen from Yale’s endowment, they made major inroads in private equity and illiquid holdings.

Today, the GIC is involved in mega buyout deals.

In any case, on April 1, 2013, a new framework was agreed upon and implemented – creating a reference portfolio. The reference portfolio is 65% global stocks and 35% global bonds. In the same hemisphere, the New Zealand Superannuation Fund (NZSF) is another sovereign wealth fund that has adopted the reference portfolio under Adrian Orr. For the NZSF, currently the breakout is 70% global stocks, 5% local stocks, 5% listed real estate and 20% fixed interest.

GIC Policy Asset Mix 2013[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

SOFAZ Testing Waters in Asset Diversification

azerbaijanmapThe US$ 34.1 billion State Oil Fund of Azerbaijan (SOFAZ) embarked on a path to diversify asset holdings. From 2011 to 2012, SOFAZ’s assets grew by 14.5%. The Central Asian sovereign fund expanded their investment policy to permit investments in gold bullion and institutional real estate. Up to 5% of SOFAZ’s assets can be allocated to gold. With regard to institutional real estate, SOFAZ made a number of property transactions in major European cities. Some notable purchases include 78 St. James Street in London and the Actor Gallery in Moscow.

Investment policy is approved on an annual basis by the President of the Republic of Azerbaijan.

Granted allocation to fixed income allotted to 94.36%, inroads were made in gold, equities and real estate investments. Investment policy for SOFAZ remains restricted to having 85% of the portfolio in fixed income. This minimum fixed income allocation did not permit SOFAZ to capture the rising stock market gains in late 2012 in which many other sovereign funds were able to capture. On the other hand, returns for SOFAZ year after year have been positive and less volatile.

Currency diversification included the Turkish lira, Australian dollar and Russian ruble. To boost returns in fixed income, SOFAZ has increased bond holdings in emerging market debt. Emerging market debt increased to 14% in 2012.

SOFAZ Investment Portfolio by Asset Class

Asset Class Weight
Fixed Income 94.36%
Gold 2.35%
Equities 2%
Real Estate 1.29%

Source: State Oil Fund of Azerbaijan Annual Report – Data from 12/31/2012

Japan’s GPIF Posts Record Annual Performance, Allocation Shifts

photosynleafSlight modifications in asset allocation can benefit Japan’s Government Pension Investment Fund (GPIF) which is the largest public pension fund in the world. Japanese Prime Minister Shinzo Abe’s administration has embarked on an ambitious growth strategy for Japan; part of the plan includes guiding public savings toward the stock market to stimulate growth. The GPIF along with other public funds and government funds have been urged to invest in Japanese equities as well as overseas equities. The possible, incredible mobilization of savings will hopefully augment corporate investment and consumer spending.

Imagine nearly US$ 2 trillion in public investor capital allocating a greater percentage toward Japanese equities.

Performance wise in early 2013, equities have been a blessing for the GPIF posting a strong 2012-2013 record return generating 10.23% versus a return of 2.32% from the previous year. As of March 31, 2013, the GPIF holds ¥120.5 trillion (US$ 1.2 trillion) in assets. Most notably, there was a 23% return in Japanese stocks and 29% in overseas equities. A weaker Yen helped these numbers.

GPIF – Policy Asset Mix

Domestic bonds Domestic stocks International bonds International stocks Short-term assets
Future 60% 12% 11% 12% 5%
Previous 67% 11% 8% 9% 5%

Source: Government Pension Investment Fund (Japan)

Change is coming as the mega pension fund will be slicing Japanese government bonds in favor of equities. The pull toward higher-yielding assets is partly a complement to Japan’s aging demographic. Executives at the GPIF conducted a handful of analyses determining increased risk in JGBs because of duration lengthening. Another analysis was conducted on correlations and that risks of stocks and international bonds were lowered when four additional years were added post-crisis. Last, the modification in policy mix has been tested to perform well in a number of scenarios including one in which the long-term interest rate will increase in five to seven years.

Q&A with Uche Orji, CEO of the Nigeria Sovereign Investment Authority

Uche Orji

Uche Orji

This interview will appear in the 3Q Y2013 (October 2013) issue of the Sovereign Wealth Quarterly.

This is a Q&A with Uche Orji, the Managing Director/CEO of the Nigeria Sovereign Investment Authority (NSIA).

1. How can Nigeria’s sovereign wealth funds act as a catalyst and channel foreign investment to Nigeria?

The NSIA seeks to be the investment partner of choice for global investors in Nigeria. Global investors are increasingly looking to Nigeria as one of the next major growth markets and many are in search of a local partner of choice that speaks the language of the private sector and can effectively interface with government. To that end, the NSIA has recently signed MoUs with General Electric and the Africa Finance Corporation, among others. The focus of these MoUs is on infrastructure investment through the NSIA’s Nigeria Infrastructure Fund. The Future Generations Fund, which has a global mandate, will also selectively make domestic investments through its illiquids allocation.

2. Can you go into detail about the Stabilisation Fund and the purpose of it?

The objective of the Stabilisation Fund is to provide stabilisation support to the economy during times of economic stress. The Stabilisation Fund will be mainly managed in-house in a diversified portfolio of liquid, low risk products such as Treasury bills and liquid, short-term, investment grade bonds.

3. What is the mechanism for ongoing funding with regard to the Nigerian Sovereign Investment Authority?

The NSIA’s funding mechanism is defined in the NSIA Act. Essentially, it is the excess hydrocarbon revenue (oil and gas) above the budgeted “Benchmark Oil Price” set annually by the National Assembly, less contributions to budgetary buffers.uche_orji_2

4. What sectors will the Nigeria Infrastructure Fund be allocating to?

The Nigeria Infrastructure Fund will focus on infrastructure projects in Nigeria that meet our financial return hurdles. The Infrastructure Fund is presently carrying out detailed reviews of a number of sectors, including transportation, healthcare, water resources, and energy infrastructure.

5. Does the Future Generations Fund have a target allocation by asset class?

Yes, the Future Generations Fund has a target asset allocation by asset class. This allocation will continue to develop over time. Broadly, the Future Generations Fund will invest in listed securities, including equities and fixed income globally; unlisted securities, including private equity, real estate, commodities, as well as inflation hedges.

6. When selecting investment managers and partners, what criteria are essential to you?

Philosophy, investment process and alignment are our required objectives. We also look for a sound reputation, performance track record, and a balanced service team i.e. quality, stability and cost of service.

7. How will the Nigerian Sovereign Investment Authority be a major regional player in the African institutional investor community?

Discipline will be the key to our success. The NSIA has received seed funding of $1 billion. While this is a modest sum by global standards, the NSIA, through the government’s disciplined contributions to the fund, could become one of the largest pools of capital in Sub-Saharan Africa. Secondly, the NSIA’s governance will be the key factor that sets us apart. The NSIA Act is very clear that the NSIA is an independent organization and the Federal Government has been very committed in supporting this. We describe our model as “F-I-T”: Financial sustainability Independence in decision-making, and Transparency in process. Finally, our ability to draw in international co-investors will only serve to enhance our credibility as an investment house.

About Uche Orji

Mr. Uche Orji is the Managing Director/CEO of the Nigeria Sovereign Investment Authority (NSIA). Mr. Orji joined the NSIA as CEO on October 2nd 2012 from UBS Securities, where he was Managing Director in the New York branch of its Equities division. Prior to his experience at UBS, Mr. Orji was a Managing Director in J.P. Morgan’s Equities division in London. Prior to JP Morgan, Mr. Orji was at Goldman Sachs Asset Management, London, as analyst/portfolio manager.

Mr. Orji holds a BEng in Chemical Engineering from the University of Port Harcourt, Nigeria and an MBA from Harvard Business School.

About the NSIA

The Nigeria Sovereign Investment Authority (NSIA) was set up by an Act of Nigeria’s National Assembly (the NSIA Act) in 2011. The objective of the NSIA is to promote fiscal stability, build a savings base for future generations of Nigerians and enhance the development of Nigeria’s infrastructure. The NSIA’s investments are made through three distinct funds: Stabilisation Fund, Future Generations Fund, and the Nigeria Infrastructure Fund. Please visit the NSIA at:

Temasek Holdings Swings to Prosperity in 2013

Ho Ching, CEO of Temasek Holdings

Ho Ching, CEO of Temasek Holdings

Singapore’s Temasek Holdings has released their 2013 review. Created in 1974, with a small portfolio of S$ 354 million in assets, today Temasek Holdings boasts S$ 215 billion (US$ 173.3 billion). Like many other sovereign funds and pensions, Temasek Holdings recently benefited from a rising stock market. The state investor off Singapore’s Orchard Road had a total shareholder return was 8.86% compared to 1.5% last year. Temasek Holdings has about 73% of their portfolio in liquid and listed assets.

“We are almost entirely invested in equities,” Temasek’s CEO Ho Ching said in a statement today. “This means a lot more year to year volatility, as we have seen over the last 10 years. We are prepared to ride through the large mark to market volatility on our portfolio value, because a portfolio of mostly equities also means we expect higher returns over the long term.”

With investment offices scattered throughout Asia and the popularity of the Asian growth tale, Temasek Holdings has extensive exposure to the region, holding steady at 71%. This allocation percentage includes China assets at 30% and Singapore assets at 23%. Ho Ching mentioned a continued focus in Latin America, North America and Europe. In fact, European and North American investments grew by 12%. With renewed interest in the West, the Singapore state-owned investor plans to open offices in New York and London.

Portfolio Value of Temasek Holdings

Year Singapore Dollars (Billions)
2003 61
2004 90
2005 103
2006 129
2007 164
2008 185
2009 130
2010 186
2011 193
2012 198
2013 215

Source: Temasek Holdings

Temasek Holdings focuses on direct investing, less than 10% of the portfolio is with third party managed funds.

Significant Exposure to Financial Institutions
Temasek Holdings has high portfolio exposure to banks and other financial institutions at around 31%. The Singapore giant has significant positions in a variety of financial service companies such as DBS Group Holdings Ltd., Industrial and Commercial Bank of China Limited, China Construction Bank and Standard Chartered Plc. With respect to the major Chinese banks which are also investments of Central Huijin Investment Ltd. (owned by the China Investment Corporation), Temasek sees the banks as having adequate loan-to-deposit ratios. Economies with a growing middle class further increase activity in banking and other financial products like life insurance. Temasek Holdings also has investments in insurance companies in China such as Ping An Insurance Group and AIA Group Ltd which was a forced spin-off from AIG.

A Bitter Pill for Emerging Markets

cloudsSovereign wealth funds have opened their enlarged ears on Ben Bernanke’s spoken words – the word tapering. Central bank actions have contributed volatility in government bond yields which has stressed public investors. A gradual withdrawal of excess liquidity would stem the tide of hot money flowing to emerging markets. This is a wake-up call for institutional investors that have significant exposure to emerging markets. Sovereign funds like Temasek Holdings and Singapore’s GIC have made huge bets in large companies in Southeast Asia, especially in banking. The Abu Dhabi Investment Authority modified their asset allocation to be more accommodative to investments in Latin America and Asia. The China Investment Corporation has been an avid investor, investing in South Africa’s Shanduka Group, paying two billion rand for a stake.

The majority of institutional investors still perceive emerging markets as an asset class, even though each “emerging market” is quite diverse in their makeup. The effect of QE policy will impact each emerging market different.

Trouble is brewing in the world of BRICS. Profiting from positive economic growth in recent years, a slowdown in growth will fan the flames of discontent. Nations with current account deficits like Brazil seem to be at most risk for institutional investors. In addition, commodity dependent countries may be vulnerable if China slows down their economic workshop.

Could the decrease in hot money have an impact in Brazil? Inflation in Brazil has caused social tension. The rise in the cost of public transportation augmented the cost of living in Brazil. On June 18, 2013, 50,000 protestors assembled in the streets of Sao Paulo to express frustration at the government.