Webinar: SWF Strategies In Today’s Economy

Posted on 12/05/2023

SimCorp recently partnered with SWFI for a discussion on sovereign wealth fund strategies that included Kashif Khalid, Managing Director of Middle East & Africa, SimCorp, Dr. Domenico Mignacca, Executive Director of Investment Risk Investment Strategy, Qatar Investment Authority, and Muhammad Faris Muhammad Jamal, Senior Vice President of Investments, Khazanah Nasional Berhad. The discussion was moderated by Edward Longhurst-Pierce, Managing Director, UK and Europe, Sovereign Wealth Fund Institute.

Muhammad Faris Muhammad Jamal began the discussion by pointing out “The key thing that we have to do in these challenging macroeconomic environments where cycles have become faster and faster, shorter and shorter, is to keep the [Fund] diversified.” He also pointed out that “Cash is a real asset class again.” Diversification, he points out, is more difficult than it appears because a 60-40 portfolio could suffer, with both equities and fixed income down by 20% in a year. “We’re not taking much of a growth bet,” he added.

Dr. Domenico Mignacca followed. He commented on his work analyzing and supporting investment decisions. He said: “We try to build up a risk approach to the portfolio that is consistent inside the investment process . . . You can analyze the portfolio from a performance point of view, from a risk point of view, or from an asset allocation perspective.” He pointed out that you can use different models, but his goal is to find a common ground for all of the approaches. Consistent modeling helps a manager make decisions. “Sometimes risk can be an obscure topic,” he noted. Risk can be difficult to explain, he suggested, but risk analysis helps predict the investment performance of the portfolio. The driver of the portfolio is a priority, along with discovering where the uncertainty is. The importance of communicating with management was essential to his efforts.

Kashif Khalid took the floor next and spoke on the shift in the way sovereign wealth funds invest. It includes new techniques and tools, and new risk frameworks. Conviction and hesitancy are having a tangible impact on the allocation of capital. Kashif Khalid pointed out: “With a higher cost of capital as well . . . we’re seeing a bit more investment into newer asset classes which haven’t been a part of the sovereign wealth fund space. Things like private credit.” Managing cost structures was also a priority, he explained. Adapting to the financial landscape today requires skill and is challenging: “They’re in flight, and they’re trying to change engines while they’re in flight.” This comparison was used to explain the complexity of the shifts, and the level of transformation occurring. To sum up, he says, it’s a “big mix of different things” and “there’s a lot happening, and we’re talking to a number of our partners and seeing how we can help enable them in achieving those goals.”

Dr. Mignacca said diversification is not necessarily the best approach in his view. He prefers to concentrate on a well planned strategy to maximize gains. He believes high conviction decisions should not need to be diversified as much as some others may prefer in their portfolios. Dr. Mignacca mentioned that some ETFs were highly diversified. SWFI’s Edward Longhurst-Pierce summed up the round of commentary as “Not to diversify for diversification’s sake,” to which Dr. Mgnacca replied “Exactly.”

Muhammad Faris Muhammad Jamal posed the question his team faced: “How much return can you get for one unit of risk?” “You can’t simply just move your goalposts because the market dynamics for stocks and bonds doesn’t work anymore,” he said. This is where other asset classes that have no correlation to equities or bonds come in. He mentioned Absolute Return strategies and suggested it could be time for funds to dip into the class in addition to maintaining other more traditional investments. Hedge funds, he noted, were not preferred partners for some sovereign wealth funds since the 1997-8 Asian financial crisis. However, it is important to keep an open mind as stocks and bonds may not provide historical returns going forward.

Kashif Khalid spoke on the importance of data: “It holds a lot of insight, a lot of information. You need to be able to understand where to look, how to look, and so on.” He thought capturing and knowledgeably analyzing data was essential, with data sets in “multiple places,” that is, in different departments and data that is outside the organization. Partners are interested in data in times of stress also, with knowledge needed about how much exposure one has to a particular distressed bank, in his example. He also highlighted: “Having the right operating model gives you optionality. That’s very key.” He thought the strategy of “buy and hold” was not going to hold up in today’s investment landscape.

SWFI partnered with SimCorp to make this webinar possible. Founded in 1971, SimCorp provides clients with a full front-to-back-offering, whether through a SaaS (software as a service) platform or as an on-premise solution. Clients include central banks, sovereign wealth funds, pension, insurance funds, asset managers, fund managers, asset servicers, and wealth managers. SimCorp supports clients 24/7 through delivery centers around the world. Key locations are in Manilla in the Philippines, Noida in India, Kyiv in Ukraine, Warsaw in Poland, and Mexico City in Mexico. SimCorp is a subsidiary of the Deutsche Börse Group and is headquartered in Copenhagen, Denmark.

In November 2023, SimCorp announced its merger with Axioma, a provider of solutions for portfolio optimization and risk management.  There merger is intended to help clients leverage an industry-leading investment and risk management technology platform. Offices will expand to more than 30 and there will be more than 2,800 employees in all upon completion of the merger.

Additional insights can be found by listening to the webinar. SimCorp’s link to the discussion can be found here: https://www.simcorp.com/en/insights/on-demand-webinars/2023/optimizing-risk-and-exposure

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