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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.

Saudi Aramco Contemplates SABIC Stake from PIF

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Oil giant Saudi Aramco is in early discussions on whether to pursue an ownership stake in Saudi Basic Industries Corporation (SABIC) from the Public Investment Fund (PIF). At the moment, Saudi Aramco has no plans to buy publicly-held shares of SABIC. SABIC was founded in 1976 by Saudi royal decree to convert oil by-products into useful chemicals, polymers, and fertilizers.

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SWFI First Read, July 19, 2018

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GIC Eyes Provenance Land

GIC Private Limited is nearing a deal to purchase up to 50% of Provenance Land. Provenance Land owns India’s first Four Seasons hotel.

Eduard van Gelderen Leaves UC Regents for PSP Investments CIO Role

Eduard van Gelderen exited his position as Senior Managing Director at the University of California Regents’ Office of the Chief Investment Officer. His role will not be replaced. He accepted an offer to be Chief Investment Officer of the Public Sector Pension Investment Board (PSP Investments).

PAAMCO Prisma Holdings CEOs to Exit

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Google Fined Big Time by EU Regarding Antitrust Violations

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The European Union (EU), through its competition commissioner, levied a €4.34 billion fine against Alphabet Inc., the owner of Google. The fine is over Google having “imposed illegal restrictions on Android device manufacturers and mobile network operators to cement its dominant position in general internet search,” according to the European Commission (EC).

The European Commission is requiring Alphabet to cease from its conduct that it is accused of within 90 days or face penalty payments of up to 5% of the average daily worldwide turnover of Alphabet, Google’s parent company.

Commissioner Margrethe Vestager, in charge of competition policy, said in a press release, “Today, mobile internet makes up more than half of global internet traffic. It has changed the lives of millions of Europeans. Our case is about three types of restrictions that Google has imposed on Android device manufacturers and network operators to ensure that traffic on Android devices goes to the Google search engine. In this way, Google has used Android as a vehicle to cement the dominance of its search engine. These practices have denied rivals the chance to innovate and compete on the merits. They have denied European consumers the benefits of effective competition in the important mobile sphere. This is illegal under EU antitrust rules.”

The EC press release added, “In particular, Google: 1. has required manufacturers to pre-install the Google Search app and browser app (Chrome), as a condition for licensing Google’s app store (the Play Store); 2. made payments to certain large manufacturers and mobile network operators on condition that they exclusively pre-installed the Google Search app on their devices; and 3. has prevented manufacturers wishing to pre-install Google apps from selling even a single smart mobile device running on alternative versions of Android that were not approved by Google (so-called “Android forks”).”

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