The State Oil Fund of Azerbaijan (SOFAZ) has purchased Pine Avenue Tower A in Seoul, South Korea for US$ 447 million. The prime office complex was sold utilizing a competitive auction process managed by Mirae Asset Management on behalf of the four owners which include, NongHyup Bank, NongHyup Life insurance, Woori Bank and KDB Life Insurance. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
Sovereign and Public Investor Topics: Asset Allocation and Policy
Alternatives - Hedge Funds and Private Equity
Real Estate and Infrastructure |
Central Banks and Monetary Authorities
The 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
Source: State Oil Fund of Azerbaijan Annual Report – Data from 12/31/2012
VTB Bank has finalized its 102.5 billion roubles (US$ 3.3 billion) offering of new ordinary shares. Qatar Holding, the State Oil Fund of Azerbaijan, Norges Bank Investment Management and China Construction Bank have purchased 55% of the new shares issued. VTB chairman Andrei Kostin mentioned the three sovereign funds investing about US$ 500 million each.
VTB Bank’s supervisory board approved to increase the financial institution’s equity capital through new ordinary share issuance. VTB Bank was keen on attracting new strategic investors, while strengthening connections with existing institutional shareowners. VTB Bank is making major inroads in retail banking. From the beginning of 2013 till April 23, 2013, retail loans grew 36%.
VTB Bank was formerly known as Vneshtorgbank and was created as Russia’s foreign trade bank on October 17, 1990. By 1998, VTB was reorganized as an open joint stock company.
Russia’s second biggest lender, state-run VTB Group, is raising nearly 102.5 billion roubles (US$ 3.3 billion) in a share sale. VTB Group plans to sell 2.5 trillion new shares. With regard to sovereign fund investment, included are Norges Bank Investment Management (NBIM), the State Oil Fund of Azerbaijan (SOFAZ) and Qatar Holding LLC. The government of Russia owns 75.5% of VTB Group’s shares according to a company report. In addition, the government of Russia waived their right to subscribe in the offering, a sign to investors of their intent of cautious privatization. The stake may be reduced down to 60.9% as a result of the share sale occurring.
The consumer credit market is augmenting in Russia and VTB Group desires an increased presence in retail lending. The raised funds will also lift the group’s capacity adequacy levels after large acquisitions like OAO Bank of Moscow and OAO TransCreditBank.
The pipeline will deliver gas from the Caspian field of Shah Deniz to Europe.
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The State Oil Fund of Azerbaijan (SOFAZ) is looking to acquire core real assets in Australia, particularly Sydney. Australia has been a noteworthy real estate market for a number of sovereign wealth fund property investors. Australia has access to Asian nations and has robust transparency in property markets. Office and retail properties have been targets for foreign investors.
SOFAZ has moved forward with real estate purchases in cities such as London, Paris, and Moscow.
A new investment policy was adopted by the State Oil Fund of Azerbaijan (SOFAZ) with the purpose of enhancing profitability and diversification. SOFAZ can now invest up to 5% each in gold, equities, and real estate. In the month of December 2012, SOFAZ made a number of European real estate purchases. Beginning February 1, 2012, SOFAZ began the purchase of 25 gold bars (conforming to London Bullion Market Association standards) per week from market-maker member banks of the LBMA.
As of December 31, 2012, SOFAZ has 480,146 troy ounces of gold in their portfolio. The gold is temporarily stored in vaults at JP Morgan in London as SOFAZ plans to import physical gold into the Azerbaijan. SOFAZ plans to build a vault for such holdings.
The State Oil Fund of the Republic of Azerbaijan (SOFAZ) purchased their third property investment, this one in Moscow’s central business district at 16 Tverskaya Street for US$ 133 million. The Gallery Actor is a mixed-use office and retail complex that was owned by Metropolitan Insurance Group, part of the VTB Group.
Built in 1881, the historic Gallery Actor is near Red Square and the Kremlin.
The State Oil Fund of Azerbaijan (SOFAZ) has made its second European real estate purchase. The property located in Paris, 8 Place Vendôme, was purchased for €135 million from AXA Real Estate Investment Managers. The prime office and retail property attracts strong rental income. The building was constructed in 1712 and was built to honor French King Louis XIV.
From the press release, commenting on the sale, Israfil Mammadov, CIO of SOFAZ said: “With these recent real estate transactions SOFAZ has established its presence in two main commercial centers of Europe – London and Paris. Next year we will continue building our globally diversified real estate portfolio reflecting our investment strategy that foresees investments in core prime office space with strong fundamentals.”
The State Oil Fund of the Republic of Azerbaijan (SOFAZ) purchased their first property investment in London’s West End for £177.35. SOFAZ bought 78 St James’s Street, an office complex, from RREEF Real Estate, the real estate investment arm of Deutsche Bank’s Asset and Wealth Management division. The St. James’s part of London is trendy with private wealth managers and hedge funds. The 188,600 square foot building is entirely leased to HSBC Bank with a net initial yield is 4.5%.
From their press release, Shahmar Movsumov, Executive Director of SOFAZ commented: “Sovereign Wealth Funds across the globe are looking for ways of diversifying their risks by expanding their investments beyond traditional asset classes. For the last decade SOFAZ has been growing rapidly both in terms of the size of the assets under management and its investment universe. Today I am delighted to announce SOFAZ’s first direct real estate investment. This newly acquired office building in London is the first in a row of planned property acquisitions in prime business districts of major cities around the world. The secure income that this type of investment will generate over the years coupled with strong fundamentals of prime office spaces in major world capitals are the determining factors in our investment rationale.”
The State Oil Fund of Azerbaijan (SOFAZ) will allocate AZN 2.149 billion for investment projects in 2013. Azerbaijan’s Finance Minister Samir Sharifov made the announcement at a recent parliamentary committee meeting on the state budget for 2012.
In September 30, 2012, SOFAZ had 1.35% allocated to equities and 1.86% allocated to gold, the rest was in fixed income and cash.
Sovereign investors view gold as a store of value, an alternative currency to dollars, yen, and euros. Sovereign funds in the Middle East feel that Western nations have excessive fiscal debt, which leads to quantitative easing to make it easier to service debts.
Azerbaijan’s State Oil Fund (SOFAZ) is diversifying their portfolio by planning to have 7.5 tons of gold reserves by the end of 2012. Overall, SOFAZ would like to accumulate up to 30 tons of gold over the next two years. According to reported statistics from SOFAZ, gold holdings amounted to 6.847 tons as of July 1, 2012.
SOFAZ’s gold is planned on being stored in Azerbaijan’s central bank.
SOFAZ can invest in gold bars that conform to the requirements of the London Bullion Market Association. Up to 5% of their portfolio can be allocated to gold.
According to the press release, “State Oil Fund of the Republic of Azerbaijan (SOFAZ) is planning to invest in equities to increase the diversification and profitability of the investment portfolio. According to the 2012 Investment Policy of SOFAZ approved by the decree of the President of the Republic of Azerbaijan dated December 29, 2011, up to 5% of the Investment portfolio of SOFAZ can be invested in equities in 2012.”
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The State Oil Fund of Azerbaijan (SOFAZ) hinted in moving into other asset classes such as European commercial real estate. Some fixed income instruments have grown in risk and some have yielded poor returns. The fund may diversify into European real estate in developed and transparent markets. Most European and Central Asian sovereign wealth funds started their journey in European real estate in the United Kingdom. The next cash flow incursions would most likely be in Germany or France. As of early 2012, the sovereign wealth fund has very little exposure to equities, mostly allocations to fixed income in corporate bonds, agencies, supranational debt, sovereign debt, and other fixed income investments. The fund also has heavy exposure to Europe.
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 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 content. ]
The State Oil Fund of the Republic of Azerbaijan (SOFAZ) grew in asset size to reach US$ 21.7 billion. Budget revenues from oil continued to pour in to increase SOFAZ’s growth. Since the beginning of the year, AUM has grown 45.8% more. Oil experts predict reserves will run out in around 26 years without additional discoveries.
SOFAZ is thinking of new ways to invest oil funds as peak production in Azerbaijan will end soon in the next five years. They plan to decrease allocation to fixed income and increase allocation to equities. In fact, they are taking steps to move in that direction. Already SOFAZ is looking at passive equity investments in the developed world.
The assets of SOFAZ as at April 1, 2009 stood at 8 721.4 mln. manats (USD 10 863.9 mln.).
read more: SOFAZ
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