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Q&A with Massimiliano Castelli at UBS Global Asset Management




Dr. Massimiliano Castelli

This interview will appear in the 2Q Y2012 issue of the Sovereign Wealth Quarterly.

This is a Q&A with Massimiliano Castelli, Head of Global Strategy in Global Sovereign Markets at UBS Global Asset Management.

To purchase The New Economics of Sovereign Wealth Funds, please visit: Book Link

About the Book
In May 2012 Wiley Finance released his last book, The New Economics of Sovereign Wealth Funds, a one-stop guide to the macroeconomic environment within which sovereign wealth funds (SWFs) operate. The book provides a thorough guide to SWFs, covering the drivers of the industry, how it operates and grows, the interest from and in Western markets and the pivotal role that SWFs play in the world economy. The activity of SWFs has often ignited a political reaction and a protectionist backlash. By going beyond discussions based on misconceptions to analyze state capitalism, this book evaluates the role played by SWFs within the dynamics that are reshaping the economic and financial geography in the 21st century. The book argues that the emergence of SWFs represents a major element of the secular shift of power from mature Western economies to vibrant emerging markets. It offers an all-encompassing perspective, from a rigorous analysis of the economic and financial drivers of their growth to an accurate description of how these institutions invest for the long-term in global capital markets in the global economy. Identifying the drivers of the growth of SWFs, the book discusses commodity prices, macroeconomic imbalances and current account surpluses. The book goes on to analyze SWFs in the wider global macroeconomic context and examines their capital allocation across regions, asset classes and currencies. The final chapters identify the challenges for SWFs in the new regulatory framework and explore how they are increasingly investing in emerging markets. Finally the book provides an overview on how the Western world is reacting to the growing role of state-controlled investment vehicles and the initiatives by international institutions to find common ground. Written by two celebrated practitioners working in the industry, The New Economics of Sovereign Wealth Funds presents insights from officials in charge of investing a large pool of assets in global capital markets and includes a preface from John A. Fraser, Chairman & CEO of UBS Global Asset Management.

1. Can you tell me about you and Fabio Scacciavillani’s latest book, The New Economics of Sovereign Wealth Funds?

The book is the result of several years of research on Sovereign Wealth Funds (SWFs) I carried out at UBS in various positions. In my earlier years at UBS, as a senior economist for the Middle East region, I witnessed the rapid growth in the wealth accumulated by Gulf commodity-exporting countries. This experience provided me with the opportunity of understanding the key drivers of the accumulation of assets held by commodity-based SWFs.

In my following position as Head of Public Policy EMEA at UBS I dealt with the policy debate surrounding the investment activities of SWFs in Western economies. Following the political controversy surrounding the takeover of British company P&O by Dubai Port World (which is not even a SWF!), several Western governments started a review of their regulations on foreign investments. At that time, the main fear was that the increased investment activities of SWFs in the Western world might lead to a negative political backlash, ultimately resulting into the introduction of protectionist measures against state-controlled investment vehicles.

The eruption of the financial crisis in 2008 substantially reduced these fears and most Western economies are now dealing with deleveraging and have become much more welcoming of SWFs’ investments. Finally, since I took up my current position as Head of Global Strategy in Global Sovereign Markets, the department at UBS Global Asset Management serving sovereign institutions globally, I have been focusing on the investment side of the activities of SWFs.

In the last few years, research on SWFs has increased a lot but most of these publications have focused on the undue influence SWFs might exert through the acquisition of “strategic assets” and on the political backlash that has resulted. When I met Fabio, who is the Chief Economist and a member of the Investment Committee of the Oman Investment Fund, we both felt the need for a different and innovative approach. We have focused on the fact that the rise of SWFs is driven by the shift of the economic centre of gravity from mature economies to large emerging markets (especially in Asia), and to commodity-exporting countries, some of which have been wealthy nations for a long time (e.g. Norway, Canada, Australia). According to this approach, the book discusses in detail the macroeconomic dynamics behind SWFs, their size and growth up to 2016, how and why SWFs invest in global capital markets and the changing geopolitics surrounding the rise of these state-controlled investment vehicles. Finally, the book discusses at length the risk management for SWFs that has become an issue of paramount importance following the global financial crisis.

2. In general, how have the economics of sovereign funds changed after the global financial crisis?

As any other investors in global capital markets, SWFs have suffered heavy losses in their portfolios as a result of the collapse in asset prices. The losses experienced during the crisis have brought into question the “traditional” way of investing, largely based on the stability of risk/return estimates and correlations of asset classes. What recent history has shown is that correlations are unstable, risk premia change, risks from non-traditional asset classes are not always well understood and you need long periods for Strategic Asset Allocation (SAA) assumptions to materialize. Since then, several SWFs have started a gradual upgrade of their investment framework, by incorporating diversification of risk exposure rather than purely across asset classes, “dynamic” allocations to take advantage of the historically high volatility prevailing in capital markets since the crisis and – last but not least – a robust risk framework to better assess drawdown risks.

What the financial crisis has not changed in the economics of SWFs are the drivers of their growth: high commodity prices and the reliance on export-led growth models in emerging markets; both leading to persistent current account surpluses that translate into the accumulation of foreign assets. With regards to commodity prices, the sharp fall experienced in 2008 in the wake of the Lehman bankruptcy proved to be just a temporary pause in a secular trend started in early 2000s for which the underlying rationale is rapid economic growth in emerging markets propelling the demand of natural resources and food commodities and stretching supply to the limit. The second driver has its roots in the aftermath of the Mexican and Asian crises of the mid 1990s which represented the first major hiccups of globalisation. In the painful aftermath of those crises, the authorities in most emerging markets adopted very cautious fiscal and monetary policies translating into the accumulation of foreign exchange reserves. The resilience of most emerging markets during the crisis and their ability to recover much faster than advanced economies provided further support for such a policy stance.

3. Sovereign wealth funds as an investor class continues to grow. How large do you expect sovereign wealth funds to be in 2016?

In the book an entire chapter is dedicated to an estimate of the growth potential of SWF’s assets to 2016. Starting from the optimal management of central bank foreign exchange holdings and having estimated their growth, the growth in the assets managed by SWFs is determined by three factors: the return on the wealth accumulated, the fiscal policy framework adopted by the countries concerned and the new funds transferred from the current account surpluses. Based on this approach, we estimate that by 2016 assets managed by SWFs will be between USD 8.6 trillion and USD 10.8 trillion (reflecting three different return scenarios). Our estimates are made at country level and one important observation concerns the increasing concentration of the assets managed by SWFs in a relatively small number of countries: Norway, UAE, Saudi Arabia (which does not formally have a SWF), China, Kuwait, Qatar, Hong Kong and Singapore will account for 85 per of the total. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

SWFI First Read, May 25, 2018



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CPPIB Targets 33% in Emerging Markets by 2025



The Canada Pension Plan Investment Board (CPPIB) generated a net return after expenses and pension contributions of 11.6% for the fiscal year ended March 31, 2018, versus its reference portfolio of 9.8%. For the reported fiscal year, CPPIB grew its net assets to a new high of C$ 356.1 billion (US$ 277.2 billion), compared to C$ 316.7 from the year previous.

Mark Machin, President and Chief Executive Officer at CPPIB, attributed the performance to the rising tide in public equity markets across most geographies, whose volatility in recent months was buoyed by significant fourth quarter earnings in the fund’s private holdings. Public and private equities, CPPIB’s first and third largest asset classes by exposure at 38.8% and 20.3%, saw estimated returns of 11.4% and 16.1%, respectively. Machin joined CPPIB in 2012 and was moved to the top in June 2016, following the departure of Mark Wiseman. Machin has a knack for the Asian region, being CPPIB’s first president for Asia and also spent nearly 20 years in Asia, working at Goldman Sachs. CPPIB plans to continue heavily investing in the APAC region, along with India.

Emerging Markets

“By 2025, we will invest up to a third of the Fund in emerging markets, which by that time are anticipated to account for 47% of global GDP,” said Machin in his section of the annual report outlining the pension’s updated strategic plan. CPPIB currently has C$ 56.1 billion invested in emerging markets, C$ 22.4 billion of which is wrapped up in China.

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Public Equities

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