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Are Sovereign Funds Ready for Another Market Shock?

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Sovereign wealth funds such as Singapore’s GIC Private Limited, Australia’s Future Fund and the New Zealand Superannuation Fund carefully issued warnings to the media and stakeholders about expecting lower investment returns in the coming years. Will their expectations come to fruition? The first shock, the rapid drop and prolonged period of low oil prices, applied mostly to commodity-based sovereign funds. While hundreds of asset management executives and salespeople are returning from their August vacations, equity markets in the U.S. experienced losses. Hedge funds and technical traders acted on information and trading volumes and timed exits, pushing down U.S. equities on August 20th. In fact, August 20th, 2015 was the worst day for the S&P 500 and Dow Jones Industrial Average since February 3, 2014. Markets are truly about investor confidence and when money managers see headlines that Greece’s Prime Minister is resigning, China is attempting to stave off major market drops in equity markets and possibly stimulating currency wars, the fragility of U.S. markets becomes more apparent. Faring worse, commodity trading giants like Glencore Plc have lost 70% of their market value since flotation in May 2011. Qatar Holding, a unit of the Qatar Investment Authority (QIA), once was the biggest shareholder in Glencore, backing its efforts to takeover Xstrata in 2012. Since 2014, the QIA has been slashing its ownership stake in Glencore, reading the writing on the wall with regard to lower global demand commodities and precious metals. Glencore’s CEO Ivan Glasberg’s stake in May 2011 was worth US$ 9.4 billion, in mid-August 2015, his stake dropped down to US$ 2.8 billion. Other commodity trading firms are at risk such as Noble Group which has ties to sovereign funds.

Continual Migration of Fixed Income into Real Assets

Sovereign wealth funds, known for their long-term horizon, have gradually expanded exposure to asset classes such as real estate, private equity and infrastructure; however, in total, a large percentage of assets are allocated to fixed income and listed equities. For example, Norway’s Government Pension Fund Global’s (GPFG) performance is highly dependent on the whims of equity and fixed income markets, real estate makes up a measly 2% of assets (given it takes time to deploy massive amounts of capital and Norway’s SWF ranks in the top #10 of biggest allocators to real estate by dollar amount.) Large sovereign funds, funds over US$ 100 billion, have few options to prepare themselves, when markets begin to face down. Many funds have made moves to get out of fixed income and invest in real estate, even perceiving the properties as a de-factor currency or store of value. Government bonds have been performance draggers for many institutional investors.

Currency Wars

Currency devaluation, or in some cases manipulation, is a politically-sensitive topic. The countries of China, Vietnam, Taiwan, South Korea and Japan carefully watch each other on currency devaluation and monetary policy as their economies are export-driven. On August 21, Japanese Finance Minister Taro Aso gave warning to China against pre-mediation of moving yuan rates, urging the country to move the yuan toward a market-oriented fashion. Over the last twenty years, China had the strongest currency in emerging markets and most resilient economy in emerging markets. China has changed its course. The August 11th yuan devaluation was followed by two more similar measures in a quick succession. However, China has a case against Japan, the European Union and United States, which have all enacted major unprecedented economic stimulus policies for extended periods of time. China’s economic figures, such as a slowing down of exports, shrinkage in the powerhouse’s manufacturing sector, falling wholesale prices and concerns of growing debt in the shadow banking market in mainland China, have been reasons for the country to devalue the yuan. With all this being said, China’s devaluation has triggered a wave of depreciations, leaving many emerging markets in a far worse position. In the following week after August 11th, the Kazakhstan tenge, Turkish lira and Vietnamese dong experienced currency depreciation. Thus, wealth funds that have allocated to emerging market equities will probably take further hits in their EM portfolios.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

SWFI First Read, January 18, 2018

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Celgene Eyes Juno Therapeutics

Celegene Corporation is in discussions to buy Seattle-based Juno Therapeutics. Juno Therapeutics has backers which include the Alaska Permanent Fund Corporation (APFC). Celgene has roughly US$ 12 billion in cash and already has a relationship with Juno Therapeutics.

Auckland International Airport Sells Down Airport Holdings in NQA and Cairns

Perron Investments and The Infrastructure Fund, current investors in North Queensland Airports, which includes Cairns Airport, agreed to acquire Auckland International Airport’s 24.6% stake in the holding entity for A$ 370 million. Perron Investments is the privately-owned investment entity of Australian billionaire Stan Perron.

Pemex and Mitsui in Final Talks on Tula Project

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Apple’s Ginormous Corporate Cash Pile Plans to Come Home

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The positive economic effects of U.S. President Donald Trump’s tax reform have already altered the financial behaviors of major U.S. companies such as Wal-Mart Stores, Apple Inc. and AT&T.

In response to the tax law reform, many American businesses, large-to-small in annual revenues, have issued bonuses, granted awards and signaled plans to increase capital expenditures in the United States. For example, Apple announced plans to give its employees US$ 2,500 each in stock awards. A key section of the new U.S. tax reform law includes a provision for firms to take advantage of a one-time payment of 15.5% on repatriated funds down from the 35% rate.

Initial Plans

With the Dow Jones Industrial Average (DJIA) reaching new highs and the tax reform deal signed into law, Apple revealed they would invest US$ 350 billion into the United States economy over a period of five years, as they repatriate massive piles of money from overseas. The iPhone maker estimates they will payout roughly US$ 38 billion in tax payments from the overseas repatriation – thus shifting back some US$ 245 billion out of the US$ 252.3 billion it has held offshore. Apple also plans to spend an estimated US$ 30 billion in capital expenditures over the next five years, with roughly US$ 10 billion in U.S. data centers, according to the company. Apple has plans for 20,000 more jobs to create. The company that was once led by Steve Jobs had faced substantial criticism in the press over outsourcing its manufacturing to China to avoid paying U.S. taxes and lower manufacturing costs. Many of those facilities in China had labor issues such as environmental concerns, slave-like wages and extremely long work hours.

“We believe deeply in the power of American ingenuity, and we are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” said Apple CEO Tim Cook in a statement on January 17, 2017. He added, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”

Liquid Financials and Fixed Income Changes

The sales growth of the iPhone has been a major factor in the growth in Apple’s cash pile. In 2006, Apple moved to act, forming a subsidiary in Nevada to manage investments, initially starting with around US$ 13 billion to manage. Nevada has no corporate income tax and no capital gains tax. Apple manages its investments through an outfit in Reno, Nevada called Braeburn Capital Inc. (Braeburn is a type of Apple), a subsidiary of Apple. Apple also employs some 40 to 50 external fund managers to handle the massive portfolio, according to sources. Braeburn has tried to reduce money management costs by using more separate accounts, while reducing dependence on money market funds.

As of September 30, 2017, Apple has a large investment portfolio worth an excess of US$ 300 billion, with US$ 194.714 billion in long-term marketable securities. Some US$ 128.645 billion are in current assets, with US$ 20.289 billion in cash and cash equivalents.

Focusing on the investment portfolio, some US$ 152.724 billion is held in corporate securities, with US$ 55.245 billion in U.S. Treasuries. Most of the portfolio is held in fixed income investments, including mortgage-backed securities – generally mandating investments be investment-grade and the avoidance of losing principal. Since 2012, Apple has been hoarding more corporate debt, rivaling some bond funds. Only about US$ 799 million are held in mutual funds (non-money market). Apple is also a major buyer of commercial paper across the globe. For example, the company participated in a US$ 500 million issue of 3-year floating notes from Hyundai Capital Services. The tech giant even uses derivatives to hedge against currency and interest rate movements.

The Old Scheme Ends

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CPPIB Partners with Lendlease on £1.5 Billion U.K. Build-to-Rent Venture

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The Canada Pension Plan Investment Board (CPPIB) has announced the launch of a £1.5 billion venture with Australian listed construction giant Lendlease Group centered around the development of build-to-rent private housing in the United Kingdom. The new infusion of capital will bolster the £800 million already committed to various projects in the Britain’s housing sector by Lendlease, which will develop, construct, and manage homes built through the partnership.

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