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Survey Reveals Most Asset Owners Remain in Holding Pattern

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According to the quarterly SWFI Global Asset Owner Survey conducted in February 2019, sovereign funds, superannuation funds, endowments, and pensions continue to see “long U.S. technology equities” as the most crowded trade. This is despite big pools of money such as SoftBank’s Vision Fund plowing billions into technology companies such as Uber Technologies and WeWork. Trade wars and protectionism remain the largest tail risk. The U.S. does have plenty of bargaining power, while Chinese banks and conglomerates remain under financial pressure. In December 2018, the U.S. trade deficit bumped to nearly 19%, displaying a trade imbalance of a decade-long high of US$ 621 billion for all of 2018. In addition, the U.S. trade gap with China on goods expanded to an all-time record of US$ 419.2 billion. Mostly noticeable in China and Europe, economic data has weakened in the fall of 2018. However, although respondents still perceive geopolitical risk as high, business cycle risk was voted the biggest potential risk to financial stability.

Mega asset owners such as Norway’s Government Pension Fund Global (GPFG) were not immune to the tail-end 2018 downturn. Norway’s SWF took a contrarian bet in listed equities at the year end of 2018. A large number of institutional investors also continue to overweight holdings in cash, waiting for more plucking opportunities. Many asset owners voted to maintain allocations in a variety of asset classes, a stark difference compared to the previous survey. Smart beta strategies continue to gain popularity consecutively from quarter to quarter, as well as private equity. Geographic sentiment also soured on Latin America including Brazil and Mexico, as well as Africa. There were very few overweight allocations to Brazil. There was more optimism in China and the rest of Asia, versus less optimism in Europe, including the United Kingdom. With regard to equities, asset owners continue to overweight consumer staples, as U.S. consumers are a key input for GDP growth versus centrally-planned economies.

In addition, with regard to asset owners, the buzz on blockchain is officially dead. The majority of respondents have no plans for blockchain, whether investing or utilizing the technology.

The quarterly survey targets sovereign funds, pensions, endowments, superannuation funds, foundations, government funds, and other asset owners.

According to Michael Maduell, president of SWFI, “Asset owners are in a holding pattern from the 2018 hangover. The larger sovereign funds and pensions are taking contrarian bets, while liability-driven asset owners are pulling back from risk.”

More About the Global Asset Owner Survey

This is SWFI’s seventh quarterly survey for asset owners. To participate in the next quarterly survey, CONTACT research@swfinstitute.org.

Yale’s Love Affair with Venture Capital Overshadows Other Asset Classes

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Yale’s US$ 29.4 endowment has earned staggering returns of 7.4% per year over the past 10 years, racing past its benchmark and adding US$ 6.5 billion to the fund. In the year ending June 30 2018, Yale earned 12.3%. Yale’s success is due to active management, and an unconventional approach to investing, at least from the perspective of a university endowment. Yale is overweight venture capital and real estate, which has paid off handsomely over the last 10 years. Many properties throughout the country have returned to, or surpassed, their pre bubble-era prices. Yale has also actively participated in leveraged buyouts. Yale is underweight U.S. equities and its fixed income holdings are low, as is cash on hand.

Yale’s annual report notes, “The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power.” Perhaps earning their Princeton Review # 3 ranking in 2018, Yale’s commitment to thinking outside the box is responsible for their recent investment philosophy: “Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.” Alternative investments have been gaining steam among major players in the global markets, including US$ 6.5 trillion investment manager Blackrock Inc. Blackrock plans to open a new European alternative asset headquarters in Paris.

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eFront Finds a Home at BlackRock

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BlackRock Inc. entered into an exclusive agreement to acquire eFront, a French software provider of risk management products for the alternative investments industry. Asset management firms are worried about margins and have increasingly acquired service provider firms to buffer revenues. BlackRock sells the Aladdin (Asset, Liability, Debt and Derivative Investment Network) platform, which is one of the largest portfolio operating systems in the investor community. BlackRock’s offer is to pay US$ 1.3 billion in cash for 100% of the equity of eFront. The seller of eFront is private equity firm Bridgepoint.

Bridgepoint acquired eFront in January 2015 in a transaction totalling approximately €300 million. In 2006 eFront listed on the Alternext Paris market of NYSE Euronext (ALEFT) and was taken private in 2011 by Francisco Partners. eFront was founded in 1999 by Olivier Dellenbach.

According to the press release, “The combination of eFront with Aladdin, BlackRock’s investment operating platform used by more than 225 institutions around the world, will set a new standard in investment and risk management technology.”

BlackRock is funding the eFront acquisition through a combination of existing corporate liquidity and debt.

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CDPQ Supports Domestic AI Fund

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Institutional investor Caisse de dépôt et placement du Québec (CDPQ), which works primarily on behalf of pension funds and insurance plans, is opening a new fund dedicated to Québec businesses that specialize in AI, or artificial intelligence. Available funds are slated at US$ 250 million for the enterprise. The commercialization of AI seems to be a natural fit for CDPQ, “Since Montréal is emerging as a global beacon of excellence in artificial intelligence, we need to enhance our offering and ramp up the financial and development support we provide AI businesses through the various stages of their growth,” according to Executive Vice President of Quebec and Global Strategy, Charles Émond. Émond aspires to see AI spread throughout “all sectors of our economy.” The AI fund will be run by CDPQ’s Venture Capital and Technology team. They will look for companies that are already doing well in the sector.

Another program is targeting early stage organizations. Mila Quebec AI Institute, a research and development organization founded by three universities, is building a new complex to help facilitate CDPQ’s goals. The new complex will house early-stage AI companies. CDPQ is especially interested in companies that can accelerate their growth and enter markets quickly, providing speedy returns. There is a social component, whereby companies will be required to contribute to Mila. Michael Sabia, President and Chief Executive Officer of CDPQ, noted, “With this partnership, la Caisse is pursuing its commitment to helping Québec businesses in this new economy thrive and expand.”

Keywords: Caisse de depot et placement du Quebec

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