Sovereign Wealth Fund Institute

Tharman Shanmugaratnam

The Government of Singapore is addressing the country’s restricted capacity for big ticket and long-tenure project financing needs in cross-border financing. To address the issue, the Government of Singapore is pushing for the creation of the Project Finance Corporation (PFC). The PFC is expected to be operational in the latter half of 2012 and will be backed by a number of stable financial institutions, including Temasek Holdings. The PFC will also include Japan’s Sumitomo Mitsui Banking Corporation, Standard Chartered Bank PLC, and Singapore DBS Group Holdings Ltd.

Ultimately, the goal of the proposed PFC is to plugs gaps in the financing of larger, long-tenure overseas projects.

From a sovereign wealth fund investor (SWF) standpoint, this is a strategic endeavor for Singapore. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Abu Dhabi’s IPIC which was included in the 3rd quarterly rankings rapidly improved their LMTI ranking. Abu Dhabi Investment Authority (ADIA) moved up to a 5 rating. Kazakhstan National Fund moved up to an 8. China’s SAFE Investment Company moved to a 4. The Libyan Investment Authority (LIA) dropped to a 1.

Read more Linaburg-Maduell Transparency Index

Governor of SA - Kevin Scarce

In fact, the multi-mineral body of Olympic Dam is the biggest uranium deposit in the world. It is the largest underground mine in Australia.

It is also purported to be the fourth largest copper deposit and fifth largest gold deposit found in the world.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The California Public Employees’ Retirement System (CalPERS) Board of Administration has accepted changes in its governance policies and practices. The investment policy subcommittee was created in 1995. On Monday, the CalPERS investment committee approved dropping its investment policy subcommittee. In addition, the board meeting agenda was streamlined. The genesis of the removal of the investment policy subcommittee was to avoid redundancy.

April 15-17, 2012, Dana Point, CA, United States

The Premier Global Summit for Sovereign Wealth Funds, Central Banks, and other Long-Term Public Investors

6 continents are represented by our current attendees.  Learn, network, and participate in an interactive forum.

We propose an information-driven, marketing-free forum where attendees share insights, engage in forward-looking discussions and learn relevant, timely market intelligence. This is an exclusive event for institutional investors, government officials, and C-Level Investment Executives who want to interact and build relationships. Discussions and presentations are purely educational. Significant emphasis is placed on peer to peer interactions, with sufficient networking time built into each engagement.

Registration Links

Non-Sovereign Attendee |   Sovereign Attendee & Public Investors

Download Agenda

Institute Fund Summit 2012 is a private event. No press is allowed.

Dated: Feb 2, 2012

Where:
St. Regis Monarch Beach
One Monarch Beach Resort
Dana Point, California 92629
United States

Sovereign attendees and public investors are not required to pay a registration fee to attend this event. The Sovereign Wealth Fund Institute has full discretion on who qualifies as a sovereign attendee. In general, sovereign attendees must be employed by a sovereign wealth fund, central bank, ministry of finance, state investment corporation, sovereign wealth enterprise, public pension fund, or governmental pension fund.

Most states in the USA are trying to attract employers and capital; many are looking at ways to get rid of their state income tax or at least lower it. States are trying to find ways to preserve their economic future and standard of living. Consequences could include for the state further growth in government budget shortfalls. To counter this, several states have sovereign funds, sometimes called permanent funds that tax natural resource extraction. This is not a new concept; it has been around since the 1800s in the United States.

Take Alaska, a major segment of the economy is dependent on natural resources such as petroleum. Alaska voters enabled the creation of the Alaska permanent fund. The fund has been successful in generating investment income over the decades.

Permanent funds can also be used to safeguard state-owned natural resources.

Back in 1969, a major oil field was discovered in Alaska-owned Prudhoe Bay area. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The New Zealand Superannuation Fund (NZSF) has a -5.28% FYTD return in 2011/2012. Since inception it has an annualized return of 6.63%. Returns are after fees but before New Zealand tax paid. In FY 2009-2010, the fund returned 15.45% and in FY 2010-2011 the fund returned 25.05%. 58.6% of the portfolio was exposed to global equities. 10.6% is exposed to infrastructure.

The NZSF owns 10.11% of Auckland International Airport.

According to the press release, “Since the first contribution to the Future Fund on 5 May 2006, the Fund has generated a return of 4.2% per annum.

The Future Fund’s return for the calendar year 2011 was 1.6%. The return for the quarter to December 2011 was minus 0.2% and for the first six months of the financial year it was
minus 3.1%.

David Murray, Chair of the Future Fund Board of Guardians said that significant stresses on the global financial system remained. “While there have been some positive signs in the US economy, underlying pressures remain and Europe continues to wrestle with debt-related challenges and the risk of recession. The prospect of a lengthy period of adjustment and subdued economic growth is generally apparent as signalled in global and domestic securities markets.

“In this environment, the Board continues to place a premium on patience and liquidity, ensuring that the portfolio is prudently positioned to take up attractive opportunities while avoiding excessive risk.

“Notwithstanding the current environment, the Future Fund was set up as a long term investment fund and the Fund’s statutory purpose and mandate leads the Board to continue to position the portfolio to achieve its long term objective,” said Mr Murray.”

Read more: Press Release

The US$ 24 billion Texas Permanent School Fund (TPSF) is currently under the Texas State Board of Education. This means all major policy, personnel and management decisions have to be made by the Texas commissioner on education. There are heavy talks to streamline bureaucracy and efficiency of having the fund be managed by a non-profit corporation.

The fund was created in 1854 expressly for the benefit of the public schools of Texas.

This non-profit corporation would have administrative and investment management control over the fund. One proposed name for the non-profit corporation is Texas Permanent Fund Investment Management Co. It would be expected the members of the Texas State Board of Education would have board seats.

In fact, this would enable the fund to operate similarly like the University of Texas Investment Management Co. (UTIMCO) which manages the endowment for the University of Texas System. In Canada and Australia, many public funds are managed by a professional public investment corporations like AIMCo (Canada) and the Queensland Investment Corporation (Australia).[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “Given the EU’s serious and deepening concerns over the Iranian nuclear programme, the Council today broadened the EU’s restrictive measures against that country. Today’s decisions target the sources of finance for the nuclear programme, complementing already existing sanctions.

The Council banned imports of Iranian crude oil and petroleum products. The prohibition concerns import, purchase and transport of such products as well as related finance and insurance. Already concluded contracts can still be executed until 1 July 2012. A review of the measures relating to oil and petroleum products will take place before 1 May 2012. In addition, the Council outlawed imports of petrochemical products from Iran into the EU as well as the export of key equipment and technology for this sector to Iran. New investment in petrochemical companies in Iran as well as joint ventures with such enterprises are also no more allowed.

The Council also froze the assets of the Iranian central bank within the EU, while ensuring that legitimate trade can continue under strict conditions. Trade in gold, precious metals and diamonds with Iranian public bodies and the central bank will no more be permitted, nor will the delivery of Iranian-denominated banknotes and coinage to the Iranian central bank. A number of additional sensitive dual-use goods may no more be sold to Iran.

Finally, the Council subjected three more persons to an asset freeze and a visa ban. It also froze the assets of eight further entities.”

Source: Council of the European Union – Press Release

The commodity-based sovereign wealth fund, the Libyan Investment Authority (LIA) during the overthrow of Gaddafi was under United Nations Security Council sanctions. The interim government (cabinet) in Libya has approved the appointment of a board of trustees. The board of trustees will most likely include the minister of economy, minister of finance, and the governor of the central bank. This is a significant step to move the mega sovereign wealth fund back on track. There are predictions that the MENA-based sovereign wealth fund will exit a large number of illiquid investments and focus more on domestic strategic development.

The Libyan Investment Authority was invested in a variety of asset classes such as stocks, bonds, private equity, derivatives, and strategic development holdings. The LIA was invested in a number of private equity funds such as the RBS Special Opportunities fund and funds managed by Goldman Sachs.

According to the Syrian Arab News Agency, “President Bashar al-Assad on Wednesday issued the law No. 2 for 2012 stipulating for establishing the National Investment Fund with the aim of contributing to supporting the stability and enhancing the confidence in the market through adopting a long-term investment policy .

The Fund also aims to achieve higher revenues and profits for the stockholders through diversifying the financial investments and providing the expertise and the suitable vocational consultation.

According to the law, the Fund will be established with a capital of SYP 2 billion.

Minister of Economy and Trade Mohammad Nidal al-Shaar said the Law will positively interfere in the financial market performance through establishing an investment sovereign fund to activate the act of the Securities’ Market.

In a statement to SANA, the Minister added that his ministry will form a board of directors for this fund that brings together those who are experts and qualified in this domain.”

Read more: SANA

Read more: Syrian Ministry of Economy and Trade

Domestic strategic development is a major goal for countries. Qatar and other oil-based economies are trying to diversify from their lucrative natural resource sector. In fact, sometimes countries can utilize a sovereign wealth fund to stimulate demand in specified sectors within a country. We have witnessed the creation of science parks and educational cities spread throughout the gulf region. The Qatar Investment Authority (QIA) is rumored to be planning to spend around US$ 2 billion into asset management firms to lure them into Doha. This strategy has somewhat worked for other gulf cities.
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The Sovereign Wealth Fund Institute is a global organization designed to study sovereign wealth funds and other long-term governmental investors in the areas of investing, asset allocation, risk, governance, economics, policy, trade, and other relevant issues. We provide specialized services such as research and consulting to various corporations, funds, and governments. The Sovereign Wealth Fund Institute delivers information and insights on current issues and trends related to sovereign wealth. Our flagship publication, the sovereign wealth quarterly is the premier publication on sovereign wealth. In addition, the Sovereign Wealth Fund Institute facilitates sovereign fund events around the world.

Learn more about the Sovereign Wealth Fund Institute by watching this brief video.

On December 8, Singapore’s Temasek Holdings raised 500 million in SGD from the sale of 2-Year zero coupon bonds. These bonds are exchangeable into shares of Hong Kong-listed supply chain manager Li and Fung. Temasek has issued exchangeable bonds through its holdings in Standard Chartered Bank shares.

China has $3.2 trillion in foreign exchange reserves. Over the past decade, China has been a key investor in U.S. government debt; however, combined with factors such as low yields and quantitative easing, China is hedging itself up the asset class ladder further into equities. In 2007, China established the China Investment Corp (CIC).

It is rumored that the People’s Bank of China plans to develop a new investment vehicle to manage investment funds worth around US$ 300 billion. The investment vehicle would be affiliated with China’s State Administration of Foreign Exchange (SAFE). The investment style would be similar to Hong Kong-based SAFE Investment Company Ltd also known as Hua An.

The proposed vehicle would operate two funds. One fund would be called Hua Mei (China-US) and focus on the United States. The other fund would be called Hua Ou (China-Europe) and focus on Europe.

A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports. The definition of sovereign wealth fund exclude, among other things, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state-owned enterprises (SOEs) in the traditional sense, government-employee pension funds (funded by employee/employer contributions), or assets managed for the benefit of individuals.

Other Attributes

Some funds also invest indirectly in domestic state-owned enterprises. In addition, they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves.

Some countries have multiple sovereign wealth funds. Some states have multiple public pension funds. Does it make sense to consolidate these governmental investment authorities to achieve greater economies of scale and be more cost effective? Due to its vast size in terms of geography and population, California is a state that has many different public pension funds and systems. Some public pensions are managed by CalPERS, while others remain independent, like LACERA. There is also CalSTRS, the public teachers’ pension fund. Yes, one can already make the argument that CalPERS is in effect the mega authority fund since it manages a significant portion of public employees’ pensions, but what if it combined with the other major pensions in California? Imagine if all the key pension authorities in California merged into one public mega authority.

In Canada, the Alberta Investment Management Corp and Caisse de dépôt et placement du Québec (CDPQ) are examples of consolidating or offshoring fund management to a central governmental authority. Ontario is one of the exceptions with five major governmental investment authorities. In Australia, there are organizations like the Queensland Investment Corporation (QIC) and Victorian Funds Management Corporation (VFMC) that were created to provide investment management services in a commercially effective and efficient manner.

Sources: Latest public available sources

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Abu Dhabi’s IPIC is now included in the LMTI ratings. SAMA Foreign Holdings, Saudi Arabian PIF, and the Abu Dhabi Investment Authority (ADIA) all moved up to a 4 rating. Malaysia’s Khazanah Nasional has moved up to a 5 rating.

Read more Linaburg-Maduell Transparency Index

NBIM NYC Office

According to the press release, “Norges Bank Investment Management (NBIM), manager of the $550 billion Norwegian Government Pension Fund Global, has filed shareholder proposals for proxy access at six US companies as part of its efforts to strengthen shareholder rights.

NBIM filed proposals on Nov. 22 at Wells Fargo, Charles Schwab, Western Union, Staples, Pioneer Natural Resources and CME Group to give shareholders the right to nominate candidates for board elections on company ballots. At filing, the fund held stakes of 0.6 percent to 1.1 percent in these companies, valued at a total $1.4 billion.

The right to nominate candidates to the board of publicly listed companies is a fundamental principle of good corporate governance. While this is upheld by US law, the process is cumbersome and costly because shareholders must submit alternative agendas at annual general meetings and distribute documentation among investors. Proxy access simplifies this process by allowing shareholders to put their nominees straight on the company’s agenda.

“Board members must be held accountable,” says Anne Kvam, global head of ownership policy at NBIM. “When they fail to meet our expectations, we as shareholders should be able to propose alternatives without incurring prohibitively high costs.”

The US Court of Appeals in July rejected a proposal by the US Securities and Exchange Commission to introduce universal proxy access. In the absence of such a rule, NBIM will seek to change the bylaws at US companies where it is particularly important for shareholders to be able to nominate alternative board members, such as corporations that have demonstrated poor corporate governance or unsatisfactory financial performance.

“This is the first time we file proxy access proposals,” says Kvam. “We will continue to identify companies with unsatisfactory performance.”

NBIM proposes each company establish a procedure for shareholders to nominate candidates to the board on the company’s ballot, subject to limits. Shareholders should own a minimum 1 percent of common stock for at least one year to nominate members and may propose no more than 25 percent of a board’s members. A maximum of 25 percent of the members of an elected board may have been nominated by shareholders. The six companies’ annual general meetings will be held in the second quarter of 2012.”

Read more: NBIM Press Release

By Alexia Wai-Chun Tye

Guest Contributor

On 17 November 2011, representatives of the French financial, industrial and private equity community were invited to a celebration to mark the 3rd anniversary of the creation of France’s Fonds Stratégique d’Investissement (FSI) at the Elysées presidential palace.

President Nicolas Sarkozy congratulated the sovereign wealth fund on its achievements since its creation in 2008: a total of Euro 5.9bn invested in French companies, small and large.

He also announced the establishing of 3 successor funds focused on 3 sectors: aeronautics (Aerofund 2), healthcare (InnoBio MedTech) and nuclear energy.

The event was relatively discrete, and observers noted that the President was obliged to make some new announcements on the subject of the financing of French small and medium sized companies (SMEs), an area he champions closely. The mandate of the FSI remains quite different from that of major SWFs – it is mainly inward-looking and designed as a pillar of France’s industrial policy. One of the chief objectives is to support the development of future champions of French industry, throughout the value chain, down to the smallest subcontractor. Its investments have been chiefly to insulate French SMEs from hostile takeovers, rescue distressed companies or meet financing needs that the rest of the financial markets cannot provide. Indeed France has several investment and credit entities with a multiplicity of programs to assist the development of SMEs. These institutions include CDC Entreprises (a subsidiary of French state institution Caisse des Dépôts, also the 51% parent of the FSI), OSEO, Avenir Entreprises, etc, and the challenge is how to make them all work effectively together.

To delve deeper into the French local regions, Sarkozy wants to create a new fund called FSI-Régions. He did acknowledge that there would be a slowdown in the pace of investment because of the current crisis, and made no mention of new capital injections for the FSI. He stressed that the FSI, whilst serving the national interest, aims to make a reasonable profit, “but not obscene levels of profit like hedge funds”. He also lashed out at the banks, saying that they should declare less bonuses and dividends, and concentrate more on lending to industry. In spite of the pressure to meet new capital adequacy standards, the banks must not neglect the SMEs, he said.

The reaction of the attendees was mixed. Aside from questions over its purpose, the FSI has also been criticized for investing in companies that have sold defense systems to the Libyan and Syrian regimes.

No mention of an international strategy was made – cooperation and co-investment with foreign investors could serve to attract the additional capital that the FSI needs.

Alexia Wai-Chun Tye is a Partner at AddVenture, a private equity advisory firm.

The views, opinions, positions or strategies expressed by guest contributors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of the Sovereign Wealth Fund Institute or any employee thereof.

Politically and economically, the European Union has been struggling to keep itself together. In recent months, numerous high-level government officials from several European nations have been courting foreign institutional investors to buy government bonds, allocate money to EFSF investments, and invest in capital increases in large scale European companies. Some government officials have been trying to arrange deals to sell public assets to foreign state-owned enterprises (SOE). For example, the Chinese state-owned China Ocean Shipping (Group) Company (COSCO) purchased the rights to a Greek container port in Piraeus for 35 years with an option for an additional 5 years for €3.4 billion. Some Greek dockworkers were not happy with the financial arrangement as labor rates changed and around 16% of workers were let go or forced into early retirement.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “Boeing and Mubadala Aerospace, a business unit of the Abu Dhabi-based Mubadala Development Company, a business development and investment vehicle of the Abu Dhabi government, today announced agreements to advance the commercial and military aviation industry in the United Arab Emirates (UAE). These milestones further Abu Dhabi’s plans to become a global aerospace hub, a key part of the Emirate’s economic diversification plans, and grow the strong relationship between the two companies.

The commercial and defense agreements announced today build on a framework agreement Boeing and Mubadala Aerospace signed in November 2009 to show their commitment to develop mutually beneficial initiatives in areas where there is strategic alignment between the two companies. Future partnership initiatives could include additional manufacturing, military maintenance and sustainment activities, as well as people development and training.

“These strategic agreements represent the natural evolution of the longstanding military and commercial aerospace collaboration between Boeing and the UAE,” said Mubadala Aerospace Executive Director Homaid Al Shemmari. “Mubadala Aerospace is proud to expand this partnership with Boeing and feel that this agreement shows confidence in the outstanding results that Strata Manufacturing and AMMROC offer for its customers and partners.”

Jim McNerney, Chairman, President, and CEO of The Boeing Company, said: “These important agreements will strengthen the businesses of both Mubadala and Boeing. Building on the strategic framework we and Mubadala announced at the last Dubai Airshow, we are now demonstrating our solid commitment to our partner, the UAE and the Middle East region. These agreements are a reflection of Mubadala’s outstanding capabilities and pave the way for an ever stronger relationship in the years to come.”"

Read more: Boeing Press Release

Despite all the political arguments on the validity of the Nigerian sovereign wealth funds, the authority is moving forward in developing operations and selecting candidates for executive positions. The Nigerian Sovereign Investment Authority (NSIA) is hiring. This advertisement appeared off the website of the Federal Ministry of Finance (Nigeria).

Interesting to note, “All positions will be located in Nigeria. The CEO position is targeted mainly at Nigerians within and outside the country. The CIO and CRO positions are open to Nigerian and non-Nigerian applicants.”

NSIA Advertisement

Ola Borten Moe

In Anchorage at the Alaska World Affairs Council meeting, Norway’s Minister of Petroleum and Energy, Ola Borten Moe made it clear that having a stable tax regime was critical for Norway to capitalize on its offshore oil and gas resources. Taxation structure certainty is an essential driver for oil development businesses to plan investments. The State of Alaska is in debate of whether reducing oil taxes would lead to more energy development in Alaska. One side argues that high taxes hinder energy investment and development. Norway’s tax on oil and gas companies is slightly higher than Alaska’s.

North Slope Crude – State Tax Rate is 57%, plus U.S. Federal Tax of 15% = 72%

Norway’s taxes 78% on oil and gas firm profits; however, Norway offers plentiful deductions on investments.

Recently, Norway discovered a very large oil field and has had around 150 oil and gas discoveries since 2000. This year Statoil ASA made two offshore discoveries of more than 250 million barrels of oil. Experts believe that 60% of Norway’s oil reserves are still underground. Norway does have a few advantages; one is that its offshore oil fields are closer to major markets such as continental Europe, lowering transportation costs, thus increasing profitability.

The Abu Dhabi Investment Authority (ADIA) invested in Citigroup during the subprime crisis. In November 2007, ADIA agreed to invest US$ 7.5 billion into Citigroup. Recently, ADIA ended up converting their final tranche of equity units into 5.9 million shares of common stock. With all this being said, this is another occurrence for sovereign wealth funds to be keenly aware of bank bailouts during times of crisis.

Based on Citigroup’s filing, “On October 14, 2011, an arbitration panel issued a final award and statement of reasons finding in favor of Citigroup on all claims asserted by the Abu Dhabi Investment Authority (ADIA) in connection with its $7.5 billion investment in Citigroup.”

According to a press release, ” China Investment Corporation (CIC) has completed a set of preparatory work to put China Investment International (Hong Kong) Co., Limited (hereafter referred as “CIC International (Hong Kong)”), a wholly-owned subsidiary of CIC, on course to be a fully functioning institution with senior managers appointed.

CIC International (Hong Kong) will take a market-based approach under the principle of measured progress and professional commitment, in accordance with well-defined investment and risk management strategies guided by its clear mandate.

The primary business of CIC International (Hong Kong) covers equity investment and bond investment on the public market, non public market investment and economic research.

Mr. Fan Kungsheng is appointed as President of CIC International (Hong Kong).”

Source: China Investment Corporation Press Release

Over the past century, the United States has made a tremendous effort to persuade foreign investor participation in the American capital markets. With the advent of quasi-governmental investors, the Internal Revenue Service (IRS) is seeking to clarify rules regarding taxation exemption pertaining to sovereign wealth fund investors. The thorny issue that needs clarification is commercial activity which is currently not covered for tax exemption. The IRS has released proposed regulations that provide clearer rules governing when the U.S. activities of sovereign wealth funds are exempt from taxation.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The Canadian province of Saskatchewan produces around half of the world’s known potash. Potash is mostly used for fertilizers and is a key import for emerging market food supplies. The province extracts royalties from potash production based on potash prices. Alberta has their Heritage Fund and now Canada’s New Democratic Party (NDP) political leader Dwain Lingenfelter laid out plans to create a potash fund that will set aside $100 million annually.

Canada is the biggest producer of Potash.

The proposed fund dubbed the “Bright Futures Fund” would grow to $10 billion in forty years according to the NDP. The NDP drafted the idea of a long-term savings fund similar to Alberta’s permanent savings fund and Norway’s oil fund. One key feature of the proposed fund is that it would not be used as a rainy day fund to balance the province’s fiscal budget. Implementation of the proposed fund will depend on regional elections and most likely provincial legislative action.

In the past few years, China and Russia have increasingly been improving bilateral economic ties.  The China Investment Corporation (CIC) is making its presence known in Russia. CIC has already invested in a number of small scale investments in Russia and around Central Asia. They purchased a stake in Russia’s VTB Bank for US$ 100 million. The CIC is moving forward to invest US$ 1 billion with the Russian Direct Investment Fund (RDIF). [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Sovereign Wealth Fund Forum Europe 2011

October 23-25, 2011, Montreux, Switzerland

October 14th is the last day to register.

We propose an information-driven, marketing-free forum where attendees share insights, engage in forward-looking discussions and learn relevant, timely market intelligence. This is an exclusive event for institutional investors and C-Level Investment Executives who want to interact and build relationships. Discussions and presentations are purely educational. Significant emphasis is placed on peer to peer interactions, with sufficient networking time built into each engagement.

Registration Links

Non-Sovereign Attendee |   Sovereign Attendee

View Website – Agenda

The SWF Forum is a private event. No press is allowed.

Where:
Fairmont Le Montreux Palace
Grand Rue 100
Montreux
Switzerland
CH-1820

Sovereign attendees are not required to pay a registration fee to attend this event. The Sovereign Wealth Fund Institute has full discretion on who qualifies as a sovereign attendee. In general, sovereign attendees must be employed by a sovereign wealth fund, central bank, ministry of finance, state investment corporation, sovereign wealth enterprise, or governmental pension fund.

The New Zealand Superannuation Fund has released their 2011 annual report. The report gives a stern warning that over the long-run there will be good years and bad years. The NZSF has spent this past year strengthening their framework for strategic tilting and moved capital in new value-add strategies.

Learn more: View Report

Max Giolitti

This interview appears in the 3Q Y2011 issue of the Sovereign Wealth Quarterly.

Q&A with Max Giolitti, Former Head of Risk Management and Asset Allocation at the Alaska Permanent Fund

1. For large institutional investors, what is your investment outlook on 2012, is it positive, negative, mixed?

In terms of asset prices it is mixed. Developed countries in particular are going through an adjustment period. From a “great moderation” standpoint this is a significant outlier event, but from a longer historical context it is not. Emerging countries will also experience the effects of the developed countries pains, but then the very definition of emerging implies greater volatility. My investment philosophy is based on three principles: value, risk and diversification.

I don’t try to predict which asset will do well in a given year but rather to build a risk and economic scenario balanced portfolio that won’t depend on making that choice correctly every time. From a tactical standpoint, I believe in risk factor tilts based on valuation.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

This past Saturday, Chinese officials from various organizations including the China Investment Corporation participated in a lengthy IMF meeting to discuss global economic and financial issues, especially regarding the stability of Europe. Over the past year, several European Governments deeply courted China to induce them to purchase their sovereign debt. The China Investment Corporation, one of China’s sovereign funds said it needs to protect its own interests first since that is what it is mandated to do. Basically, the CIC invests to make a commercial profit, not to bailout firms or governments for the sake of it.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the Report of the Comptroller and Auditor General, “the National Pension Reserve Fund (NPRF) was valued at €22.7 billion at the end of 2010.

Up to the end of 2010, the NPRF had invested, pursuant to directions from the Minister for Finance, an aggregate of €11.35 billion in Ireland’s two main banks, Allied Irish Banks plc and Bank of Ireland. This included reinvestment of €0.53 billion of dividends received in the form of ordinary shares.

At the end of 2010, as a result of an impairment loss of €3.7 billion, the value of these directed investments had fallen to €7.6 billion.

In 2011, the value of the directed investments has been further impaired. By the end of July 2011, the value of ordinary shares held as part of the investments had fallen from the end-December 2010 values by 67% (Allied Irish Banks plc) and 72% (Bank of Ireland).

In 2011, the NPRF has reinvested a €288 million dividend received in the form of ordinary shares from Allied Irish Banks plc and has liquidated €10 billion of assets in its discretionary portfolio. The NPRF deposited this cash in Irish commercial banks pending further direction from the Minister for Finance.

In July 2011, the Minister for Finance directed that the €10 billion be invested in Allied Irish Banks plc and Bank of Ireland and that the NPRF sell shares to the value of €1.05 billion in Bank of Ireland to a group of institutional investors.”

Source: Report of the Comptroller and Auditor General

It is no secret that listed asset managers and private equity firms are in the business of managing money for fees. In recent years, a number of sovereign wealth funds have been taking large stakes in investment firms. Some examples include the China Investment Corporation in Blackstone and Morgan Stanley, Mubadala in the Carlyle Group, Kuwait Investment Authority in Blackrock, etc. Note that in general the effect of the financial industry downturn, industry consolidation, fund product specialization, and increases in bringing investments in-house has had a significant impact in the asset management fee business.

Are investment firms more likely to be profitable when invested by a sovereign investor, or is it really the case of any large institutional investor? When SWFs invest in the actual asset manager, is there pressure to lower management fees?

Sovereign wealth funds investing in the asset management business may not want fees to be lowered, since they are investing in the business. With that being said, there is no way to track if management fees were scaled back directly, if the SWF decided to invest in a fund operated by the manager.

The below is not a scientific study but an observation:

On September 20, 2007, Mubadala invested $1.35 billion for a 7.5% stake in The Carlyle Group. They also committed $500 million to a Carlyle Fund. Mubadala was anticipating an IPO from the Carlyle Group soon, so they amped their stake in the middle of December 2010.

Source: SEC Filings – The Carlyle Group

With publicly-traded asset managers (majority non-alternative) the relationship or correlation is non-existent, see below. We postulate the downturn had more to do with profit margins compressing in FY 2010. Sell-side analysts think profit margins will increase in the projected fiscal years.

Select Publicly-Traded Investment Managers – Profit Margins
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The African country Zimbabwe is continuing on the path to establishing a sovereign wealth fund. The Indigenisation and Economic Empowerment Act is allowing the Zimbabwean Government the ability to acquire stakes in foreign-owned companies. At least 51% of shares of every public company operating in Zimbabwe and any other businesses are mandated to be owned by indigenous Zimbabweans.

The rumored name of the new state-owned investment entity is the Zimbabwe Investment Corporation (ZIC). The proposed ZIC will hold equity shares in various foreign entities acquired by the Zimbabwean Government and in addition, receive revenue from a tax on mineral production.

The Libyan Investment Authority (LIA) had been one of the leading sovereign investors in companies in sub-Saharan Africa. Mr. Gaddafi invested large amounts of funds into various companies, hotel real estate, mining, and infrastructure.

Now that Gaddafi’s regime has been toppled, how are the recipient African countries dealing with the current situation?

Tanzania is currently refusing to recognize Libya’s National Transition Council (NTC).

Kenya is divided while Rwanda recognizes the NTC. With regards to Kenya, the Libyan Arab Foreign Investment Company (LAFICO), a subsidiary of the Libyan Investment Authority owns a number of companies in Kenya including Laico Regency Hotel and Oilibya. LAFICO owns 99% in Tropical Bank, 69% in Uganda Telcom Ltd, and a 49% stake in Uganda National Housing.

In fact, the Libyan Arab African Investment Company (LAAICO), which is another SWE of the LIA, invested in numerous African countries such as:
Gabon, Congo, Burkina Faso, Niger, Mali, Guinea, Chad, Uganda, Benin, Liberia, Ethiopia, Nigeria, Madagascar, Central Africa Republic, South Africa, Eritrea, Zimbabwe, Zambia, Rwanda, The Gambia, Ghana, Togo, Comoros, Democratic Republic of Congo.

In the past, there has been restructuring to put all the SWEs directly under the LIA.

Dated Material - LAAICO Website

Globally, the financial and utility sectors in direct investments are white hot for sovereign investors. In the first half of 2011, $7.09 billion was invested by SWFs in the financial sector. This was followed by $3.13 billion in utilities. Year-to-date from 2011, we have recorded $3.41 billion in energy sector direct transactions.

Some countries with robust sovereign wealth fund direct investment inflows from the beginning of 2011 to present include the Spain ($8.41 billion), France ($6.76 billion), China ($6.61 billion), and the United Kingdom ($6.25 billion). Countries such as the United States, Brazil, and Canada have a growing number of SWF investments this year but in smaller transactional amounts. At this rate, the United Kingdom, United States, Singapore, China, and Brazil nominally had much higher direct investments in 2010 than in 2011.

In addition, we acknowledge increased real estate direct transactions by SWFs this year, but total amounts are undercounted due to the non-transparent market.

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The Sovereign Wealth Fund Transaction Database is now available online for subscribers. Transaction data can now be accessed on a more frequent basis. The SWFTD now contains over 2,700 recorded transactions.

• Access Top Ten Lists
• Time-Series Charts and Graphs
• Filter Searches
• Data Guides

Access Online Website – SWFTD

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) has releasesd their annual report. SOFAZ was founded by Heydar Aliyev. The fund receives significant amounts of revenues from sales of the crude oil and gas produced in Azerbaijan.

To read the report (external link): Report

This five page report is available for download for SWFI subscribers.  This report gives a brief overview on internal politics and sovereign investment institutions.

One of the most significant issues to comprehend when designing or managing a sovereign investment institution is domestic politics.  The variable of domestic politics must not be overlooked.  Sovereign institutions are constantly exposed to varying points of pressure from stakeholders.  The tenacity of the internal politics of managing a sovereign fund and the level of external stakeholders’ influence poses challenges to the goals, objectives, and mission of the sovereign investment institution.  These competing interests can be a finance ministry, central bank, executive branch of government, political factions, parliamentary authority, strategic interest groups, and of course, the public.

Three Stages of Internal Politics Discussed

1. Contemplation and Structuring Stage
2. Inter-Organizational Stage
3. Board Stage

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Switzerland is a major destination for foreign investments and international banking for governments. Regimes that are not in line with the United Nations have grown concerned about the safety of their overseas assets. Venezuela has shifted money and gold overseas back to Caracas. The Libyan Investment Authority and other Libyan state-owned assets were frozen internationally when the Libyan rebellion was well underway.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Sovereign investors and other governmental funds have been loaning money to emerging markets for quite some time. In some cases the loan facilities are secured by collateral such as future oil shipments. Ghana is a sub-Saharan country that is becoming a real player in both the oil and natural gas global markets. With regards to oil production, Ghana’s Western region possesses most of the offshore oil fields. This West African nation has already been exporting oil to the world. Petroleum reserves are expected to reach 5 billion barrels in five years as production ramps up.

China Development Bank Ownership

• China – Ministry of Finance – 51.3%
• Central Huijin Investment Ltd (SWE of CIC) – 48.7%

Source: Annual Report

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Hugo Chavez

Venezuela is fortunate enough to be the largest oil producer in Latin America being courted by several economic powers such as China, Russia, and Brazil.  The country is highly dependent on oil revenues and the price of oil. Nearly 95% of export earnings stem from oil revenues. With the excess petroleum wealth, the country had the ability to take on a myriad of socialist policies, increase military expenditures, and fund infrastructure projects. Venezuelan President Hugo Chavez has transformed the country in a matter of a decade to nearly a centrally planned economy. In fact, numerous foreign companies, especially in the oil sector were forced to be nationalized. Venezuelan President Hugo Chavez also made a statement to nationalize the gold industry in his country.

Recently, the South American nation approved plans to shift money and gold held abroad back to Banco Central de Venezuela. Sources believe $6.3 billion in cash reserves and at least 211 tons of gold are held internationally and are being moved.

What is the reason for the shifting of money and gold?[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Fraud risk is a huge concern for sovereign wealth funds when they invest in certain investment vehicles like hedge funds or fund-of-funds.  The aftermath of the Ponzi scheme of Bernard Madoff continues to plague investors.  The trustee, Irving H. Picard is seeking to recover money for victims of the Ponzi scheme ranging six years prior to the December 2008 disclosure.

The main source of the complaint is that the Abu Dhabi Investment Authority withdrew money from Fairfield Sentry Ltd which is the largest feeder fund implicated in the Ponzi scheme.  Irving Picard is liquidating Madoff’s firm under authority of United States law to recover $300 million in redemption payments made to the Abu Dhabi Investment Authority from Fairfield Sentry in 2005 and 2006. The rational stems from the redemption payments made to ADIA were the proceeds of Madoff’s Ponzi scheme obtained from other investors or other Sentry investors.

The trustee filed a US$300 million lawsuit against the Abu Dhabi Investment Authority. There is no claim on wrongdoing on ADIA’s part.

Sovereign Wealth Fund Forum Europe 2011

October 23-25, 2011, Montreux, Switzerland

Sovereign wealth funds are $4.7 trillion in assets. Now more than ever it is paramount to be part of the dialogue. S&P has downgraded the United States, Europe is facing sovereign debt issues, and Asia and other emerging economic regions are trying to contain inflation. Attend our exclusive event and receive fresh insight through various leaders and experts in the field. Our interactive forum provides for real discussions, with no product marketing and powerpoints.

The SWF Forum will be held in late October in Switzerland. The Sovereign Wealth Fund Institute has created the SWF Forum for Sovereign Wealth Funds, State Investment Corporations, Sovereign Wealth Enterprises, State Owned Enterprises, Central Banks, Government Funds, and Governmental Pension Funds to meet and discuss relevant topics in the Sovereign Wealth Space.

We propose an information-driven, marketing-free forum where attendees share insights, engage in forward-looking discussions and learn relevant, timely market intelligence. This is an exclusive event for institutional investors and C-Level Investment Executives who want to interact and build relationships. Discussions and presentations are purely educational. Significant emphasis is placed on peer to peer interactions, with sufficient networking time built into each engagement.

Participating Panelist Organizations include: European Financial Stability Facility, Queensland Investment Corporation, Royal Bank of Scotland, BNP Paribas, Cushman Wakefield (Russia), Deloitte, & Many More

We have sovereign funds, central banks, and other governmental investors appearing from over five continents.

Registration Links

Non-Sovereign Attendee |   Sovereign Attendee

Download Preliminary Agenda

The SWF Forum is a private event. No press is allowed.

Where:
Fairmont Le Montreux Palace
Grand Rue 100
Montreux
Switzerland
CH-1820

Sovereign attendees are not required to pay a registration fee to attend this event. The Sovereign Wealth Fund Institute has full discretion on who qualifies as a sovereign attendee. In general, sovereign attendees must be employed by a sovereign wealth fund, central bank, ministry of finance, state investment corporation, sovereign wealth enterprise, or governmental pension fund.

Read more Linaburg-Maduell Transparency Index

High world oil prices greatly contribute to Nigeria’s currency reserves. Nigeria’s foreign exchange reserves slightly moved down from $34.57 billion on July 13, 2011, to $33.54 billion on July 22. This amounts to around a $1 billion drop. At the same time last year reserves were at $37.86 billion.

Even though the United States is facing a large deficit issue and a debt ceiling conundrum, the decline in reserves were most likely attributed in the growth in demand for U.S. dollars in the domestic market.

The press release states, “the report presents the performance of the funds under GIC’s management. The 20-year annualised real rate of return is the key focus for GIC as it is our mission to preserve and enhance the international purchasing power of the reserves. Starting this year, GIC is also publishing the 5-year and 10-year nominal rates of return to provide a sense of the on-going medium-term investment performance, even while GIC maintains its sights on the long term.”

Read more: GIC Press Release

The press release states, “On 26 July 2011, with the approval of its Board of Directors, China Investment Corporation (CIC) released Annual Report 2010 (hereafter referred to as “annual report”), the third annual report by CIC since its inception.

The annual report, consisted of Overview, Culture and Core Values, Corporate Governance, Investment Strategy and Management, Risk Management, Human Resources, Outreach Activities and 2010 Financials, provides comprehensive information on CIC’s operation and major progress in the year of 2010.

In 2010, CIC reduced its cash holdings as a proportion of total portfolio and further diversified its investment portfolios. The return on its global investment portfolio was 11.7% in 2010 and the cumulative annualized return was 6.4% since its inception.

Mr. Lou Jiwei, Chairman & CEO of CIC said in his message for the annual report that 2010 was a year of substantial growth and accomplishment for CIC. As CIC fully deployed the investible capital in its global portfolio, it continued to develop its organization and build its institutional capabilities. CIC earned a satisfactory return for its shareholder and continued to manage the risk profile of its invested portfolio effectively.”

Read more: China Investment Corporation Press Release

Uncertainty is the breeding ground for greater risk and volatility; behemoth conservative investors adore certainty. Sovereign funds have the distinct advantage of being long-term investors; however, short-term risk is increasing as uncertainty looms around deficit and debt ceiling issues. The August 2nd debt ceiling deadline is creeping up. No official deal has been approved by all parties involved. The major rating agencies have continued to project concerns on U.S. sovereign ratings for certain scenarios. With regards to sovereign wealth funds, there is a tremendous issue of macroeconomic concern for their investment portfolios and holding companies.

At the Sovereign Wealth Fund Institute, we predict that there is a 50% chance of a downgrade in the remaining part of 2011 for the United States.

A high probability remains that the United States will not sufficiently address long term deficit issues. Raising taxes or trimming beloved entitlement programs in the midst of a period of high unemployment is politically dangerous. Thus the downgrade could fall into the AA category. There is a slight chance of a debt ceiling rupture. This could possibly lead to a technical default on U.S. treasuries or a default on other U.S. financial obligations. This would be a disastrous scenario that would impact all financial markets.

United States – Gross External Debt Position: March 31, 2011 – Currency Composition of Gross External Debt

Source: U.S. Treasury – Millions of U.S. Dollars – 6/30/2011

With all this talk, a downgrade to AA for the United States will result in more of an embarrassment, than catastrophic depression. Sovereign funds and other large institutional investors will continue to buy U.S. treasures, but maybe not at the rate of the past five years. In addition, SWFs will perceive U.S. treasuries as no longer a riskless asset, if they haven’t already. The process of diversification from U.S. treasuries would accelerate dramatically whether in countries like Germany or Canada, or gold.

Mumtalakat Holdings, Bahrain’s sovereign wealth fund will continue to support Gulf Air financially. Gulf Air is the national air carrier in the Kingdom of Bahrain. Unfortunately, Gulf Air will be a strain on the fund’s 2011 earnings. Gulf Air was negatively affected by the political unrest that swarmed the country. Management at Mumtalakat Holdings sees Gulf Air as a challenging asset; however, airlines are a strategic industry for the Kingdom of Bahrain.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Deep in Mongolia lies Tavan Tolgoi, otherwise known as Five Heads. It is located 550 kilometers from Mongolia’s capital Ulaanbaatar. Tavan Tolgoi is one the largest deposits of coal in the world. Sovereign wealth funds and other investors have been investing in several coal mining operations.

Now that Mongolia has opened up Tavan Tolgoi allowing private companies to develop mining operations, the country is contemplating ways to best utilize its mineral revenues.

Chinese, Russian, and American companies are developing parts of the block. The estimated value of the mineral deposits is a bit greater than US$ 1 trillion. The Government of Mongolia is trying to figure out a way to best serve its citizens. Dutch disease can be a curse and crush ailing industries. The Government has publicly stated it wishes to avert that scenario.

The Prime Minister of Mongolia sees promise in how the Norwegians, Canadians, and Chileans handled their resource surpluses.

The press release states, “The SAFE recently released China’s International Investment Position for year-end 2010.

The statistics reveal that at the end of 2011 China’s external financial assets reached USD4126 billion, up 19 percent over that at the end of 2009; external financial liabilities reached USD2335.4 billion, up 20 percent over that at the end of 2009; and external financial net assets reached USD1790.7 billion, up 19 percent over that at the end of 2009.

Among the external financial assets, direct investments abroad totaled USD310.8 billion, portfolio investments totaled USD257.1 billion, other investments totaled USD643.9 billion, and reserves assets totaled USD2914.2 billion, accounting for 7 percent, 6 percent, 16 percent, and 71 percent respectively of the external financial assets. In terms of external financial liabilities, foreign direct investments totaled USD1476.4 billion, portfolio investments totaled USD221.6 billion, and other investments totaled USD637.3 billion, accounting for 63 percent, 10 percent, and 27 percent respectively of external financial liabilities.

The International Investment Position (hereinafter referred to as the IIP) is a statistical statement reflecting the stocks of financial assets and liabilities of one country or region to other countries or regions in the world at one specific point; together with the Balance of Payments Statement (BOP Statement) it constitutes the complete international accounts system, indicating the trade flows of the country or region.

The SAFE revised its IIP for year-end 2009 according to the latest data.”

Read more: SAFE Press Release

The Dodd-Frank Wall Street Reform and Consumer Protection Act is now a U.S. federal statute and signed into law by U.S. President Barack Obama.  Now that the law is in place, U.S. agencies such as the Commodities Futures Trading Commission (CFTC) and the Federal Reserve Board are drafting proposals under newly minted regulatory powers, especially in the area of swap margin requirements and classifying swap participants.  Counterparty risk cannot be understated and it furthered the slogan “too big to fail”.  The agencies are proposing to include sovereign funds as “financial end users” or “financial entities”.  If this proposal passes, this will increase their margin requirements, essentially mandating sovereign wealth funds to pledge their assets to back American financial institutions.   This brings further issues to light, since some sovereign funds may need legislative or committee action to enlarge the amount of pledged assets to meet margin calls.  There is also political risk that foreign governments might counteract by providing similar legislation against the U.S. government.

Under the proposal, they state:

“The Commission notes that these types of sovereign counterparties do not fit easily into the proposed rule’s categories of financial and nonfinancial entities. In comparing the characteristics of sovereign counterparties with those of financial and nonfinancial entities, the Commission preliminarily believes that the financial condition of a sovereign will tend to be closely linked with the financial condition of its domestic banking system, through common effects of the business cycle on both government finances and bank losses, as well as through the safety net that many sovereigns provide to banks.

Such a tight link with the health of its domestic banking system, and by extension with the broader global financial system, makes a sovereign counterparty similar to a financial entity both in the nature of the systemic risk and the risk to the safety and soundness of the covered swap entity. As a result, the Commission preliminarily believes that sovereign counterparties should be treated as financial entities for purposes of the proposed rule’s margin requirements.”

Source: U.S. Commodities Futures Trading Commission

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Many South American countries are facing the stress of unwanted appreciation in their currencies. Colombia is joining the chorus with Brazil. The Colombian President Juan Manuel Santos is against added interest rate increases by the Banco de la República de Colombia (Central Bank). The Colombian peso is gaining tremendous ground on the US dollar. The pesos appreciation could spur a move to have government regulators limit the amount of foreign investment. Colombia wants to balance demand between its export market and demand of direct foreign investments.

Sovereign wealth funds are attracted to South America with its burgeoning middle class and lush natural resources. Such a reversal in foreign direct investment policy could hinder future investment opportunities and be harmful to local workers.

One way to help lower demand for the Columbian peso would be to create a sovereign fund to invest abroad. Colombia is another Latin American country fortunate to have significant amounts of oil and other precious metal deposits. Mr. Santos is fully aware of the issue of Dutch Disease and how it can affect a fragile country that is trying to diversify into a number of industries. To prevent rapid currency appreciation and the harming of other industries, Mr. Santos is seeking legislation to create a sovereign fund. The sovereign fund would save excess oil and mining revenue.

When properly implemented, leverage can be a financial tool to enhance total return. A number of sovereign wealth funds employ the use of leverage in a variety of investment strategies. AIMCo (Alberta Investment Management Corp), which manages a number of governmental funds including the Alberta Heritage Fund would like more control on the amount of money it can borrow to make investments. AIMCo also manages public pension money and the Government of Alberta limits the amount of leverage pension funds can utilize in investing. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

This interview appears in the 2Q Y2011 issue of the Sovereign Wealth Quarterly.

ISRAFIL MAMMADOV IS CHIEF INVESTMENT OFFICER OF THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN (SOFAZ). Currently, SOFAZ ranks a 10 in the Linaburg-Maduell Transparency Index.

1. Is the current global market providing a positive investment environment for SOFAZ, and what type of changes would you like to see?

Similar to other investors whose portfolios consist mainly or entirely of fixed-income securities, SOFAZ suffers from the current low-yield environment in the financial markets. Therefore, SOFAZ reduces duration and favors higher coupon bonds in order to avoid negative return. Moreover, credit spreads remain wide and there are still some good values in lower credit rating securities. SOFAZ takes advantage of these opportunities by shifting towards lower credit rating securities. Additionally, considering the current environment in some emerging markets and southern European countries, SOFAZ also benefits from the current investment opportunities in these markets.

It goes without saying that, the best possible way to benefit from the current environment would be the introduction of equities and alternative investments to current portfolio, which SOFAZ is planning to start investing in soon.

2. Will 2010 go down in history books as a good year or bad year for sovereign wealth funds, and why? How did 2010 impact SOFAZ?

In general, 2010 has been a good year with significant upward trends in SWFs’ assets under management. SWFs gained positive returns from their investment portfolios, even though these returns were comparatively lower than 2009 levels. Recovery in global financial markets continued with a slow pace in 2010.

2010 has also witnessed post-crisis tendencies, one of which was the shift of geographical focus of investments. High level of unemployment and economic slack faced in developed countries has made investments unattractive in these countries. On the contrary, investments in the emerging markets have seen significant rise during the course of 2010. Another tendency was a shift towards equities and alternatives, since fixed-income markets have not provided high returns over 2010 due to low yields and high volatility of prices. However, the opposite is true for equities, which demonstrated decent level of growth (5-7%).

SOFAZ investment portfolio faced 1% return in 2010 – the lowest return since inception. This level of return is characterized by several reasons. Firstly, it was due to the ultra-low yield environment dominating the market. Another reason is that a large portion the investment portfolio consisted of short-term maturity bonds. Finally, unexpected sovereign debt crisis observed in some European economies also contributed to the level of returns of the SOFAZ investment portfolio in 2010. From the beginning of 2010, SOFAZ started investing in securities with lower credit rating, in order to increase returns without taking high interest rate risks, as well as to diversify its investment portfolio.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Chile’s President Sebastian Pinera stated during a televised national address about the proposed fund, “It’s time to stop the protests and recover the paths to dialogue and agreements.”

There are several key reasons why countries create sovereign wealth funds. Sovereign wealth money can provide countries with a lifeline of benefits in times of need, whether it’s stabilizing the budget, providing the public economic dividends, or capitalizing banks or state owned corporations. Luckily for Chile, it is the world’s largest copper producer.   Chile’s President Sebastian Pinera has proposed a $4 billion fund for higher education, following weeks of massive protest over education costs and standards. Access to quality education and financing remain a nettlesome challenge for Chile and other countries.

The proposed education fund will receive money from a combination of sources including, the public treasury and savings held in Chile’s Economic and Social Stabilization Fund.

In the aggregate, Chinese bank stocks have fallen ever since Moody’s Investors Services released information that Chinese banks might have higher than expected exposure to local government debt.  There is tremendous concern that Chinese lenders will be incapable to absorb losses on defaults; however, a Chinese government plan to clean up the problem could alleviate the situation.  [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]