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3 Patterns Heading into 2017 for Sovereign Funds and Asset Owners

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What trends will bleed into 2017 with regard to sovereign wealth funds, pensions and other asset owners?

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U.S. Equity Markets Look Attractive to Some Mega Asset Owners
Was the Trump victory rally just representing a reversion to the mean in U.S. equity markets? Renewed confidence in the U.S. economy and greater certainty has galvanized institutional investors such as the Korea Investment Corporation (KIC) and California Public Employees’ Retirement System (CalPERS) to rethink tactical allocation in public equities. With positive manufacturing data, healthier earnings growth prospects and possible changes in U.S. regulatory policy, U.S. equities could ride out into the 2017 sunset. Some institutional investors, like Australia’s Future Fund, are deploying more smart beta strategies, honing in on select factors, to catch the equity wave, rather than spending money on active managers. Smart beta strategies are subject to a wide dispersion of returns due to the growing number of factors to be selected. However, as U.S. pensions pile into low-volatility strategies, others are opting out, growing weary of its popularity.

Sovereign funds like GIC Private Limited are on the front line, partnering with non-banking financial institutions to lend money in a variety of markets such as the U.S., U.K. and even rapidly-developing economies such as India.

Asian Asset Owners Seeking Reliable Income
Asian institutional investor giants such as Japan Post Group are seeking reliable income overseas, in both traditional and non-traditional yield-oriented investments. Japan Post is looking to possibly allocate capital to real estate managers, targeting U.S. real estate, while other institutional investors like Japan’s Government Pension Investment Fund (GPIF), less further along in moving capital, hired CBRE Advisors to study the American property market. Some Asian investors are investing in mezzanine debt. As confirmed by SWFI Compass, an RFP and opportunity tracking service, South Korea’s Military Mutual Aid Association has conducted a study to see the advantages of investing in offshore non-performing loans and private credit funds. Other Korean public funds have invested in mezzanine debt in offices in Silicon Valley that have marquee tenants such as Alphabet (formerly Google).

Harvesting the Illiquidity Premium in Private Credit
Lock up too much in private credit, and the institutional investor may encounter liquidity issues, while committing too little, the asset owner may not receive the return given its intended allocation. Sovereign funds like GIC Private Limited are on the front line, partnering with non-banking financial institutions to lend money in a variety of markets such as the U.S., U.K. and even rapidly-developing economies such as India. With prolonged deleveraging in the banking system, wealth funds, pensions and private equity funds continue to generate risk-adjusted returns in exchange for being patience. U.S. pensions like the Orange County Employees’ Retirement System (OCERS) opted for allocating capital toward private credit managers even though the pension is contemplating lowering its credit allocation from 14% to 13%. OCERS is also considering eliminating its absolute return program, which consists of hedge funds and global tactical asset allocation (GTAA) strategies. OCERS’ pension peer, the State of Wisconsin Investment Board, recently allocated US$ 40 million toward Arbor Debt Opportunities Fund I, a captive subordinated debt fund managed by Chicago-based Arbor Investments.

Cryptocurrencies Creep into the Middle East

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Banking behemoth J.P. Morgan Chase disclosed its own digital currency called JPM Coin. The digital token will be used to settle payments between clients. JPM Coin will be backed by physical U.S. dollars and be based off Quorum. Quorum is J.P. Morgan’s private Ethereum-based chain. JPM Coin plans to compete with Ripple, which created XRP, another digital currency that is used for settlements. Ripple’s main target market is cross-border payments and remittances.

The Central Bank of the United Arab Emirates and the Saudi Arabian Monetary Authority have unveiled their plans for Aber, an interbank digital currency. Both banks have indicated that Aber will be limited to financial settlements using distributed ledger technologies. It will be rolled out on a probational basis, and used by select banks within the two countries. A date for rollout has not yet been declared. A joint statement hinted at a broader application of the currency in the days ahead. If “no technical obstacles are encountered, economic and legal requirements for future uses will be considered.”‏ Blockchains and Distributed Ledgers technologies will be employed. The plan is for ‘Proof-of-Concept’ testing, which involves studying and fully comprehending the ways modern technologies can achieve practical applications. The digital currency has the potential to become a reserve system for central payments.

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CPPIB Inks Partnership Vehicle with La Française and its Shareholder CMNE

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La Française and Canada Pension Plan Investment Board (CPPIB) formed a strategic partnership for the launch of a real estate investment and development vehicle: Société Foncière et Immobilière du Grand Paris. The joint venture between CPPIB (80%) and Caisse Fédérale du Crédit Mutuel Nord Europe (CMNE) (20%), La Française’s shareholder, will invest in major real estate projects linked to the Grand Paris infrastructure in the Greater Paris area. The parties will initially allocate €387.5 million in equity to the venture. The partnership will target regeneration and infrastructure-led investments.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Norges Bank Governor Voices Opinion on Relaxing SWF Withdrawals over Specific Uses

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Øystein Olsen, the Governor of Norges Bank, which oversees the Norway Government Pension Fund Global (GPFG), voiced his opinion on the Norwegian government’s plans to alter the rules that regulates the country’s SWF withdrawal rules in certain circumstances. The coalition government led by Norwegian Prime Minister Erna Solberg wants to relax the limits on SWF withdrawals in specific cases. Norway’s government seeks to raid the fund to pay for the replacement of four major state buildings impacted by a terrorist attack and a crashed Royal Norwegian Navy frigate (KNM Helge Ingstad).

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