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Brief Look at the Yale Endowment Model Versus the Norwegian SWF Model

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The saying goes, when too much money is allocated into a strategy, it eventually stops working. How should sovereign wealth fund assets be managed? This is a major question for sovereign wealth funds and countries that are currently implementing them. Some have a preference toward the Norway model of managing SWF money which includes lower security ownership positions, low cost, greater transparency and less use of alternatives. The Norwegian model tends to rely on public investments, besides its latest investments in European institutional real estate. Others have witnessed the successes of the endowment model of Yale University, investing heavily into alternatives and “uncorrelated” investments, embracing private investments, and taking bigger stakes in specific investments. On June 30, 2010, the Yale endowment had 30.3% allocated to private equity and 27.5% allocated to real assets. Many sovereign funds have adopted certain aspects of the endowment model; especially given many have a very long time horizon and have a greater tolerance to illiquidity.

Sovereign wealth funds accepting the endowment model usually do not have contingent liabilities as endowments have.

FY Annual Returns 2010 2009 2008 2007 2006
Yale Endowment (June End) 8.9% -24.6% 4.5% 28.0% 22.9%
Norway GPFG (Dec End) 9.62% 25.62% -23.30% 4.26% 7.92%

Source: Annual Reports

Several large sovereign wealth funds are in the camp to take big stakes. Singapore’s GIC, Temasek Holdings, and the Qatar Investment Authority (QIA) somewhat subscribe to this philosophy. It leads to the strategy to find fewer, greater investments and increase the stake. In addition, many SWFs are investing heavily into real estate, private equity, absolute return strategies and commodities. On the other hand, sovereign funds like Norway’s GPFG have more of an index-approach to investing in equities and have ownership limits on certain individual investments. The bigger the stake, the more the investor grows idiosyncratic risk. This type of risk forces many investors to become activist shareholders, thus engaging in more shareholder activities, increasing financial and time costs.

There are other factors to consider in which we bring the argument of embracing beta strategies or alpha strategies. Realistically, most institutional investors utilize both. Cost factors are a concern for public investors and beta strategies are much cheaper than paying for active management. Norway’s GPFG relies on passive investing but it does award allocation to specialist managers who have expertise in specific areas such as a sector, country or region. Developing alpha strategies internally is even more difficult as many public investors have a challenging time hiring and retaining talent.

Lastly, in terms of assets under management, Norway’s GPFG is much larger than the Yale endowment. Second for Norway to implement the Yale endowment model, it would be very costly.

ADIA Seeks to Sell KIC Headquarters

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The Abu Dhabi Investment Authority (ADIA) is seeking to sell the building that houses the headquarters of the Korea Investment Corporation (KIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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BMO and OTPP Test Blockchain Canadian Dollar Debt Deal

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The Bank of Montreal (BMO) and the Ontario Teachers’ Pension Plan (OTPP) participated in a landmark blockchain Canadian-dollar debt transaction. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Just Group Acquires Corinthian Pension Consulting

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Just Group plc acquired a 75% ownership stake in the holding company of Corinthian Pension Consulting Limited (Corinthian Pension Consulting). Operating in the institutional world for over 12 years, Corinthian Pension Consulting provides advisory services to defined-benefit pension scheme trustees and scheme sponsors undertaking bulk scheme exercises. The remaining 25% will be retained by current shareholders of Corinthian Pension Consulting. Robert MacGregor will continue to lead Corinthian Pension Consulting, as its Chief Executive Officer. Furthermore, Corinthian Benefits Consulting Limited and Corinthian Affinity Solutions Limited will continue to operate as before, becoming part of a newly formed holding company, Corinthian Group Holdings Limited.

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