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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.

GIC Sells Arizona Biltmore to Blackstone

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Blackstone Real Estate Advisors, part of the Blackstone Group, acquired the 740-room Arizona Biltmore hotel, located in Phoenix, for US$ 403.4 million. The deal closed on April 20, 2018.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Mubadala Acquires Stake in Growing Hedge Fund Phoenician Capital

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Mubadala Investment Company, through its unit Mubadala Capital, purchased a minority stake Phoenician Capital, LLC. Although terms and size of the deal were not disclosed, the agreement grants Mubadala Capital rights to invest in a fund managed by the New York-based firm, which generated respective returns of 40.8% and 33.0% in 2016 and 2017, against benchmarks of 12.0% and 21.8% for the S&P 500. The hedge fund runs the Phoenician Offshore Fund Ltd.

[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Large Asset Managers Continue to Move Operations Out of California

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In the 2010s, Fisher Investments, an investment firm run by Ken Fisher, moved a large number of employees from the Woodside and San Mateo campuses to a town called Camas in Washington, near Portland. Vanguard has a large operational presence in Arizona, while Charles Schwab Corporation has expanded its technology operations and client services in places like Denver, Dallas, Austin and Phoenix. Dimensional Fund Advisors moved its headquarters in 2008 from Santa Monica, California to Austin.

While asset managers reap profits and try to lower employee head count costs, looking to fly-over country seems appealing.

The Pacific Investment Management Company (PIMCO), part of the Allianz family, selected Austin, Texas as its new office to hire more client services and technology talent. The PIMCO Austin office will open later in 2018. PIMCO is headquartered in Newport Beach, California, with an office in New York City.

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