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Gurus Worried, What Should Sovereign Funds Do?

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Carl Ichan. Bill Gross. Jeffrey Gundlach. Stan Drunkenmiller. Get the picture?

samurai2Several prominent investment gurus have recently made public comments regarding the state of the markets – playing a bearish tone of what is to come. Even investment banking mammoth Goldman Sachs gave a warning signal, as well as GOP U.S. Presidential candidate Donald J. Trump chiming in on August 2, 2016 on Fox Business, “I did invest, and I got out, and it was actually very good timing.”

More and more asset owners are anticipating a world where listed equities will no longer be substantial enough to carry returns for their expanding liabilities. While this monstrous shift in institutional investor asset allocation has lushly lined the pockets of alternative mangers, it does draw concern about the effectiveness of the major asset classes. This was clearly demonstrated in the latest fiscal year returns of CalPERS, Temasek Holdings, CalSTRS, China Investment Corporation, Abu Dhabi Investment Authority, etc.

I would also recommend analyzing the investor base of bond and equity markets in China, Japan, eurozone, Malaysia and other markets – central banks and other official institutions are becoming a larger part of the institutional investor mix.

Important Questions

While the famous investment gurus, the ones who manage billions for others and themselves, have called out or signaled that U.S. equity markets are sitting on highs – not being backed by fundamentals. Will the equity markets continue to rally on such factors as central bank policy and bipolar employment figures? Have listed companies properly used cheap corporate debt to innovate, spend on capital expenditures efficiently to generate organic sales versus stock buybacks and more mergers and acquisitions? In June, the trade deficit of the United States spread further apart to a 10-month high at US$ 44.5 billion, according to U.S. Department of Commerce figures. When will the dance end? The investors who can answer this questions will profit handsomely. I would also recommend analyzing the investor base of bond and equity markets in China, Japan, eurozone, Malaysia and other markets – central banks and other official institutions are becoming a larger part of the institutional investor mix.

Here are some statements from respected financial gurus:

Stan Druckenmiller, May 4, 2016 – The 21st Annual Ira Sohn Conference
The lack of progress and volatility in global equity markets the past year, which often precedes a major trend change, suggests that their risk/reward is negative without substantially lower prices and/or structural reform. Don’t hold your breath for the latter. While policymakers have no end game, markets do.

Jeffrey Gundlach, July 29, 2016 – Reuters Interview, ‘Sell everything,’ DoubleLine’s Gundlach says
“The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

Bill Gross, August 3, 2016 – Masters and Johnson Q&A
What should an investor do? In this high risk/low return world, the obvious answer is to reduce risk and accept lower than historical returns. But don’t you have to put your money somewhere? Yes, of course, except markets offer little in the way of double digit returns. Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. I don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories.

Opportunity for Sovereign Wealth Funds

With terms surfacing such as ZIRP (Zero Interest Rate Policy) and NIRP (Negative Interest Rate Policy) in pension board documents, replacing NINA (No Income No Asset) and NINJA (No Income No Job No Assets) in the press, yield-minded investors are cautious as ever, giving a blow to smart money confidence. Market confidence, a factor not used so much in smart beta, I believe is what asset owners should be looking at. Which major investor will leave the table first, after a negative swan-like event occurs? Currently, a number of large wealth funds and pensions have been moving money out of developed equities, into more liquid assets, at the same time, plunking down mounds of cash into real estate, infrastructure and venture companies. Sovereign funds are long-term investors (yes, we all know), which many have the ability to be contrarian investors, buying when there is panic. The Buffett-like wealth funds have the balance sheets to acquire real estate assets, even willing to except lower cap rates than fund investors. There will be a point in which a sovereign fund will say “no” to a core real estate asset.

However, will the next dip in equities be a short-term move to capitalize on or a deep lengthy downward move to lows?

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

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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Mubadala-Owned Falcon Bank to Begin Accepting Blockchain

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Zurich-based Falcon Private Bank Limited, which is owned by Abu Dhabi-based Mubadala Investment Company, has announced that it will now be accepting wealth originating from new and existing clients’ blockchain assets, reaffirming its position in the private banking industry as a first-mover in adopting distributed ledger technology. Assets will be accepted provided that they pass required due diligence to ensure full compliance with anti-money laundering (AML) and know-your-client (KYC) regulations and laws. The Swiss bank’s auditor PricewaterhouseCoopers (PwC) has reviewed the process, according to a press release.

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