Sovereign Wealth Fund Institute

Park Alpha, the consulting division of the Sovereign Wealth Fund Institute, has released a briefing on the Outsourced Chief Investment Officer (OCIO) model. Essentially, the outsourced chief investment officer (OCIO) model permits the advisory firm to manage the client portfolio on a discretionary basis – allowing the firm to make changes (with prescribed limits) in investments. The OCIO model behaves in a similar capacity as professional investment staff.

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We are the consulting division of the Sovereign Wealth Fund Institute. We are not a brokerage or 3rd party marketer. parkalpha website

Increasingly, sovereign wealth funds are embracing direct investing. Elephantine, aged public funds are the type of institutional investors that partake in these investment activities. Direct investors usually have massive amounts of capital that need to be put to work. On May 8, 2013, OMERS Private Equity, the private equity arm of the Ontario Municipal Employees’ Retirement System finalized their purchase of Civica Group PLC from U.K buyout firm 3i Group for an enterprise value of £390 million. Public investors like OMERS Private Equity and Government of Singapore Investment Corporation are competing for companies just like other private equity managers.

Evolution of Direct Investing[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The first quarter results for 2013 on sovereign wealth fund transparency have now been released to the public.

Click on the index image to increase size.

Read more Linaburg-Maduell Transparency Index

This is an interview between Michael Maduell, President of the Sovereign Wealth Fund Institute and Sean Glodek, a director at the Russian Direct Investment Fund (RDIF) at the Institute Fund Summit 2013 Americas in Dana Point, California.

Norway’s Government Pension Fund Global (GPFG), the largest sovereign wealth fund in Europe, wishes mainland China to open up their domestic capital markets to foreign institutional investors. Several mega sovereign wealth funds have stepped up allocation to Chinese public equities.

China’s State Administration of Foreign Exchange (SAFE) has taken steps to accommodate sovereign fund investors in China. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “The Government Pension Fund Global (GPFG) posted a 5.4 percent return on its equity holdings, or the equivalent of NOK 219 billion, in the first quarter.

“The favourable performance reflects the strong push in equity markets, particularly in January and February. Among the major stock markets, the US and Japanese markets made the largest contribution,” says Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM) responsible for managing the GPFG.

Equity investments returned 8.3 percent, while the return on the fixed-income portfolio was 1.1 percent. The return on the GPFG was 0.3 percent higher than on the benchmark index. In the first quarter, NBIM took several initiatives to promote active ownership, and will in future participate in the election of board members at some companies.

“Participation is in line with our long-term intention of establishing closer contact with company boards with a view to safeguarding the fund’s values,” says Yngve Slyngstad.

The krone exchange rate weakened against many of the major currencies through the quarter, contributing to an increase in the value of the GPFG of NOK 93 billion. In addition, capital in the amount of NOK 60 billion was transferred to the GPFG. The total value of the GPFG stood at NOK 4,182 billion at 31 March, with 62.4 percent allocated to equities, 36.7 percent to fixed-income securities and 0.9 percent to real estate.”

Sovereign wealth funds are influencing the disaggregation of global money centers. Fifty years ago, Dubai was a small, prosperous city in the Gulf. Fast forward, Dubai has transformed itself into a major financial center, along with Qatar’s Doha. In Sacramento, the capital of the state of California, CalPERS and CalSTRS have somewhat impacted Northern California allowing the proliferation of asset managers, financial service providers and consulting firms to sprout in the region. Larger pools of capital are amassing away from the traditional financial capitals.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Norway’s Government Pension Fund Global (GPFG) had their second best performance ever in 2012, generating 13.4% in returns. As Europe’s largest public equity investor, the sovereign fund returned 18.1% in equity investments. Part of the returns can be related to actions enacted by the European Central Bank (ECB) that were declared in July 2012.

According to a release by the Norwegian Ministry of Finance, “The Ministry presents analyses of several aspects of the strategy, but does not present plans for major changes to the investment strategy of the Fund.”

Norway’s GPFG is a major passive investor. The sovereign fund also believes in a level of active management. Around 60% of the sovereign fund’s assets are in public equities. In addition, 3.7% of fund assets are managed externally at the second quarter of 2012. Equity investment mandates are awarded to external managers with expertise in specific markets such as niche markets in developed economies or emerging market investments.

According to Finance Minister Sigbjørn Johnsen in the press release, “Active management has over time contributed to an excess return well in line with the expectations we have communicated.”

The Federal Reserve is stuck in an impasse and continues to pursue easy monetary policies, a sharp reversal from the 1980s. The purchasing of U.S. government bonds by central banks have helped interest rates reach new lows. From a central banker’s perspective, an increase in long-term rates will have dramatic implications for financial stability. Examining falling bond yields, not just in the United States, institutional investors must question their current bond allocations. Public chief investment officers feel there is no great strategy in traditional fixed income investments.

U.S. Long-Term Government Bond Yield – Click on Image to Enlarge

Sources: Federal Reserve, Park Alpha
Pre-1953 – yield data from Sidney Homer A History of Interest Rates.

His Highness Sheikh Khalifa Bin Zayed Al Nahyan, the Ruler of Abu Dhabi, issued an emiri decree restructuring the board of the Abu Dhabi Investment Authority (ADIA). The decree states that board members will serve a three-year term, subject to renewal.

According to the decree, members of the board include:

• Sheikh Sultan Bin Zayed Al Nahyan, the President’s Representative
• General Sheikh Mohammed Bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces
• Sheikh Mansour Bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs
• Sheikh Hamed Bin Zayed Al Nahyan, Chief of Abu Dhabi Crown Prince’s Court
• Sheikh Mohammed Bin Khalifa Al Nahyan, member of Executive Council of Abu Dhabi
• Mohammed Habroush Al Suwaidi, Advisor to the President
• Jua’an Salem Al Dhaheri, Secretary General of Supreme Petroleum Council
• Hamad Mohammed Al Hur Al Suwaidi, member of Executive Council of Abu Dhabi and Chairman of Abu Dhabi Finance Department
• Khalil Mohammed Sharif Foulathi

North Dakota’s Legacy Fund is nearing US$ 1 billion in fund assets. Voter approved in 2010, the commodity fund receives 30% of North Dakota’s oil tax collections. Fund money cannot be spent until 2017 and a two-thirds vote of the state legislature must approve. Most of the fund is currently invested in short-term low-risk U.S. bonds. The seven-member advisory board of the Legacy Fund is looking to allocate 50% of assets into stocks and other investments.

North Dakota Annual Oil Production

Source: State of North Dakota – Drilling and Production Statistics

Globally, the mega asset owners are progressively analyzing the pros and cons of allocating capital to external managers, especially in active strategies and alternative investments. Would public capital earn greater returns after fees on a direct basis versus external management? In board meetings and offsite discussions, the issue of fees has been a popular theme for asset owners, particularly with regard to private equity. With growing statistics of lackluster private equity fund performance and the awakening of zombie funds, public investors are questioning their allocation to private equity funds. In fact, buyout firms are raising less money from institutional investors. Democratization in alternative investments is occurring; one can wonder why many private equity firms went public? Sovereign funds like the Abu Dhabi Investment Authority, China Investment Corporation and Australia’s Future Fund are pursuing direct opportunities in developed infrastructure. Recent data statistics from the Sovereign Wealth Fund Transaction Database displays a higher frequency of direct transactions undertaken by sovereign wealth funds.

Stepping away from alternative investments, the asset managers most at risk are fixed income and long equity managers. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The gulf countries are employing a bevy of tactics to draw multinational firms to the region. Strategic development sovereign wealth funds (SDSWF) are keen on creating local opportunities. Dubai, Doha and Manama have pushed the envelope in constructing financial centers to diversify from the petroleum industry. Manama seeks to attract pharmaceutical companies and be a biotech hub for the region.
SBI Pharmaceuticals Co., Ltd., a subsidiary of Japan-based SBI Holdings, entered into a memorandum of understanding (MoU) with Bahrain’s Mumtalakat Holdings. The purpose of the MoU was to explore the possible creation of a pharmaceutical lab in Bahrain, specifically in the area of 5-aminolevulinic acid (5-ALA) products.

5-aminolevulinic acid is an amino acid created in mitochondria.

SBI Pharmaceuticals is in preparations for a clinical study on diabetes by using 5-ALA in areas in Bahrain. Depending on several factors, SBI Pharmaceuticals may create a biotech manufacturing base in Bahrain. In October 2012, SBI Pharmaceuticals opened a representative office in Bahrain.

On the same day, SBI Pharmaceuticals entered into a contract with Dawani Group Holding, a Bahrain-based corporate group, to create a joint venture for selling 5-ALA products in Bahrain

Skilled hedge fund managers can demonstrate they can go both long and short volatility. Volatility specialists thrive on uncertainty. They are excited when things blow up. These hedge funds are waiting for another “Lehman” event aka black swan. Institutional investors have been analyzing relative value hedge funds and funds that have a long volatility strategy for quite some time. A number of prominent public investors and endowments are seeking to carve out volatility management strategies as a separate asset class. Skeptics cite volatility is not yet an asset class. This class contends that volatility is purely a statistical measure of dispersal of returns, not an asset class, but a derivative of other asset classes.

It is nearly impossible to contain downside risk while not surrendering upside potential.

Sovereign funds that have low levels of portfolio leverage, high liquidity and long investment horizons may not want to buy equity tail-risk insurance. Allocating capital to volatility managers or embracing dedicated tail-risk hedging strategies can be costly and challenging to execute. As market risk increases, the costs of tail-hedging increases. These “insurance” costs are a drag on portfolio performance. Some sovereign funds like the China Investment Corporation (CIC) have rejected tail-risk hedging strategies after conducting studies, but would consider allocating capital in separate accounts to volatility managers. On average, tail-risk strategies performed poorly since 2009, while many public investors regained traction after the major market downturn of 2007.

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.

Niels Veldhuis

This interview will appear in the 1Q Y2013 (April 2013) issue of the Sovereign Wealth Quarterly.

This is a Q&A with Niels Veldhuis, President, Fraser Institute.

1. Can you give a brief summary on the proposed British Columbian Prosperity Fund? How would it be funded?

The B.C. Prosperity Fund is being created to set aside a portion of government royalty revenues generated from the liquefied natural gas (LNG) industry for the benefit of future generations.

2. What are the chances of the Prosperity Fund being created? If so, is there a timeline?

There is a risk that the upcoming B.C. election may impact the creation of the Prosperity Fund.

3. What are some important lessons this proposed fund could learn from the Alaska Permanent Fund, Alberta’s Heritage Fund, and Norway’s Sovereign Wealth Fund?

Thankfully there are key lessons British Columbia can learn from neighbors, Alaska and Alberta.

First, legislation for the Fund should specify the contribution rates for revenues directly linked to non-renewable resource extraction. Alberta’s Heritage Fund has no to contribution requirements while Alaska has a constitutional requirement to deposit at least 25 per cent of specified non-renewable resource revenues into the fund. (The legislation later increased the contribution rate for revenues from new oil and gas fields to 50 percent.)

Second, legislation for the Fund should also detail how the earnings can be used. Alberta’s Fund provides the government with almost complete discretion on how earnings of the Fund can be used, which explains why since its inception almost all of the earnings have been removed from the Fund and transferred to the government to finance spending. Alaska, on the other hand, specifically requires a sufficient amount of the earnings of the fund to be retained to protect against inflation. In addition, Alaskans benefit directly via dividend payments from the Fund.

4. In your opinion, should the proposed fund be used to pay down provincial debt or be used as a future generations fund for the citizens?

Paying down debt significantly benefits both current and future generations. In addition, from a financial perspective, paying down debt yields a fixed return by eliminating interest costs. If the B.C. Prosperity Fund were to issue dividends payments like Alaska, it should only do so after the Fund has eliminated the province’s substantial debt.

Perhaps the best way to benefit future generations is to use of earnings from the Fund is to permanently reduce economically-damaging taxes (i.e. corporate and personal income taxes).

5. British Columbia has at least five liquefied natural gas projects in various stages, would this proposed law effectively kill future energy development?

While the B.C. Prosperity Fund is a good idea, B.C.’s LNG industry is in the infant stage and the province must ensure that its royalty regime is internationally competitive and minimizes the negative impact royalties have on the cost of investing. In addition, future governments must avoid temptations to increase royalties. On the latter point, Alberta’s massive increases in energy related taxes in 2007 provide a useful lesson for B.C. of what not to do.

6. Anything you would like to add?

If done correctly, the Prosperity Fund could be a huge benefit to both current and future British Columbians. As with many things though, the devil will be in the details.

About Niels Veldhuis

Niels Veldhuis is president of the Fraser Institute, Canada’s most influential think-tank. Mr. Veldhuis has written 6 books and over 50 peer-reviewed studies on a wide range of economic topics. He is in high demand for his opinions and perspectives on major economic and social issues, appearing regularly on radio and television programs across Canada and in the United States. Mr. Veldhuis travels widely across North America, speaking to business groups, corporate gatherings, voluntary organizations, and students. In 2011, Mr. Veldhuis led a discussion between former presidents Bill Clinton and George W. Bush at the Surrey Economic Forum.

April 24-26, 2013, Dana Point, CA, United States

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

Nearly US$ 2 Trillion in Capital Represented – IF Summit Americas 2013

4 continents are represented by our current delegates. 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.

Keynotes

• Gao Xiqing, Vice Chairman & President, China Investment Corporation
• Bill Lockyer, State Treasurer, State of California
• Dag Dyrdal, Former Chief Strategic Relations Officer, Norges Bank Investment Management
• Daniel Hume, Partner, Kirby McInerney LLP
• Michael Dee, Former Senior Managing Director Temasek Holdings, Former CEO Morgan Stanley SE Asia
• Tokihiko Shimizu, Director-General, Government Pension Investment Fund (GPIF), Japan

Event Website

Registration Links

Non-Sovereign/Public Attendee | Sovereign/Public Attendee Signup

Institute Fund Summit 2013 Americas is a private event. No press is allowed.

Where:
Ritz-Carlton Laguna Niguel
One Ritz-Carlton Drive
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.

Temasek Holdings and other sovereign funds are taking big bets on Asia. Temasek has taken positions in Chinese banks such as China Construction Bank and the Bank of China; understanding that investing in financial institutions can be a profitable undertaking for a burgeoning economy. Confidence and optimism in China’s long-term economic growth play into Temasek’s investment themes. The Chinese government has made strides on making it easier for foreign investors to invest in domestic markets by lessening capital controls.

China, India, and Indonesia, along with other Asian nations are developing large middle classes, creating vast pools of consumers. In fact, it is projected in the next decade as much as 67% of global growth of the middle class will be derived from China and India. Annual household income levels continue to rise in the region; however, household incomes still dwarf nations such as Spain or the United States. On the other hand, the consumer credit market of Asia is beginning to expand, augmenting consumer spending. The West will still account for greater consumer spending power in the next decade, but Asia is providing a noteworthy alternative for multinational corporations.

Infrastructure investing is also an avenue for sovereign funds to capitalize on the growing middle class populations of India and China. On February 18, 2013, the United Arab Emirates and India created the India-UAE High Level Taskforce on Investment. The vehicle will be used to push through investments in industries such as infrastructure and the food supply chain.

Terminating public equity asset managers is a cumbersome act to do for sovereign wealth funds and public pensions. It sticks to the forefront of public investors’ conscience. It is less complicated than terminating private equity relationships, but still requires significant time resources. Fund manager retention and termination decisions involve high costs. Public investors need assurances that if they proceed to terminate a fund manager, they are not doing it prematurely. Some investment strategies require a cycle or two to see results. Timing is everything for a trader, not for a long-term oriented fund manager.

The step before termination involves a watch list step. The targeted fund manager is usually informed of the situation or current concerns held by the public investor. In reality, public pensions and sovereign wealth funds desire their external managers to succeed in managing their assets. Like picking trophy race horses at the track, senior public investment officers and investment consultants hope their picks to be successful. Several noteworthy factors in motion can affect termination of an external manager. The first obvious reason that comes to mind is under-performance. This is a common cause for termination.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Global financial media have been reporting the great rotation as public equity markets had a resilient month in January 2013. It seems the rotation story comes up every couple of months once news is silent about the Euro crisis or fiscal cliff issues. Does the great rotation have merit today?

Investors pumped billions into stocks in the first month of January 2013; a strong sign after years of equity sell offs. For sovereign funds, many have continued to plow money into equities, earning scorn for lackluster performance in 2010 and 2011, but in 2012 factors were different. By looking at press releases, some public funds left off 2011 and 2010 performance figures.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]