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Breaking the Mindset of Short-Termism

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Breaking the mindset of the so-called short-termism mentality is a daunting undertaking. In recent days, we have seen the returns of public investors such as the China Investment Corporation, which in 2011 had a -4.3% on their global investment portfolio or CalPERS earning a 1% return for 2011. Public pensions are under a hyper-focused microscope due to their contingent liabilities and known fact that decreases in funding levels can hit taxpayers’ wallets. This is amplified by a volatile investment universe starting with the global financial crisis in 2008. Hence the lengthy debate over public employee benefits, investment performances, administrative costs, and compensation of public investor employees. Many plans have annual target returns computed to see if the pension fund can be solvent. Investing in public markets and other asset classes produces varying returns. In fact, returns fluctuate frequently. It is nearly impossible to hit 7 to 8% annual returns every year, when you are a long-term of even a short-term investor managing a large pool of money. Public investment organizations that have a consistency of hitting a 7 to 8% return every year should raise questions to regulators.

The investment concept of long-term investing is often misunderstood by the media. Long-term investors are challenged to not only manage money but to educate the public, the media, and stakeholders that having one year of negative or lackluster returns isn’t the end of the world.

Granted, a series of negative returns should definitely raise eyebrows.

Chief Investment Officer of CalPERS Joe Dear, stated, “The key to having a strategy is working with it. The worst mistake is to abandon the strategy when it appears to have some trouble.”

This falls the other way, when public pension plans have stellar returns. In this case, politicians and cities beg for lower contribution rates and sweeter benefits. This can tip the balance and increase pension liabilities which in the end, hurt taxpayers and beneficiaries.

Maiden Lane I Ends, Federal Reserve Aims to Shrink Balance Sheet

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The U.S. Federal Reserve’s balance sheet has been set to decline automatically since 2017, as the central bank has been liquidating funds from its US$ 4 trillion in Treasury bonds and mortgage-backed securities. As holdings matured, the Fed refrained from reinvesting them. This amounts to US$ 40 billion in monetary tightening monthly. Meanwhile, interest rates have slowly, and continuously, risen. The maturation of these Fed assets could exert upward pressure on long-term yields.

Mortgage rates, applications, and home sales have been falling, likely due to the rising rates. While rates are still historically low, U.S. President Trump has criticized the rate hikes. However, the Fed has no interest in changing course, and rates are set to continue to rise. According to Fed meeting minutes, “The Chairman suggested that the Committee would likely resume a discussion of operating frameworks in the fall.”

The size and content of the Fed balance sheet going forward will be a point of discussion for Chairman Jerome Powell. While there is no end in sight for the Fed’s plans to tighten economic policy, changing conditions may warrant further examination. With the U.S. stock market thriving, there is no indication that tightening has had a material impact on the economy. However, conventional wisdom asserts that the Fed will raise rates “until something breaks.” Market commentators have also suggested that, in the event of an emergency, the Fed will have a harder time stepping in due to the size of its balance sheet. A large part of the Fed’s monetary strategy is based around communications, and Fed-watchers have made a habit of hanging on every word. The Fed announced a shrinking balance sheet well in advance, and made gradual moves in that direction. The process has been smooth thus far. The Fed’s tightening will reach its peak, US$ 50 billion, in October. It is unclear exactly how much stimulus is still needed in the economy to reach the Fed’s 2% inflation target. The Fed’s easing policies have been criticized for the lopsided benefits they provided, more for Wall Street than Main Street. However, the easing will reduce their role in the market.

The End of Maiden Lane I

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QIA Gets a New CEO

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Sheikh Abdullah Bin Mohammed Al-Thani exited as CEO of the Qatar Investment Authority (QIA). He has been appointed as minister of state by Amiri Order No. (4) of 2018.

Mansoor bin Ebrahim Al-Mahmoud is appointed as the new CEO of QIA. He held positions in various organizations such as CEO of Qatar Development Bank and worked at Qatar Museums.

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SWFI First Read, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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