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Year of the Fire Monkey

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2015 started off great, but finished weak. With three bullets of quantitative easing (QE) and forward guidance from the U.S. Federal Reserve, one would assume 2016 would have some level of positivity. 2016 is the year of the Fire Monkey and with that institutional investors need to be aware of hidden risks and signals. Large asset owners such as sovereign funds, mega endowments and pensions are becoming increasingly concerned with negative nominal interest rates and the continued pace of quantitative easing by Japan and Europe. In fact, the Bank of Japan is continuing its large-scale asset purchasing program, taking a page from the Federal Reserve. The Japanese central bank is seeking to dampen expected returns in domestic government securities, thereby encouraging money to flow into Japanese corporate debt, equities and other asset classes. With deflationary figures being reported in major economies, low rates are probably here to stay. The implications of close-to-zero or negative interest rates will continue to make “risky” assets appear less risky, forcing asset owners into illiquid ownership of more assets – just look at asset managers buying up alternatives firms.

However, the United States’ public debt spirals faster out of control, forcing a conscious reassessment by the American public.

If a pension has a 7.5% annual return target and a yield on Treasuries nets around 1.82%, asset owners will have to crank up the risk ratchet. Will negative interest rates become a normal policy move? The Bank of Japan signaled its willingness to traverse into negative interest rate territory. Before the move, large asset owners like Japan’s Government Pension Investment Fund (GPIF) began shifting billions out of Japanese government bonds into domestic equities and other asset classes. Japan Post Bank is looking at investing private equity, real estate and possibly infrastructure.

Deflation should not be investors only jarring concern. The U.S. federal debt was around US$ 9.99 trillion in 2008. In 2016, the federal debt surpassed US$ 19 trillion. It is true the United States is viewed as the world’s safe haven. In September, the Qatar Investment Authority (QIA) and PSP Investments opened up offices in Manhattan – a sign of confidence. The China Investment Corporation (CIC) also recently shuttered its Toronto office for NYC digs. The concept of sovereign creditworthiness is essentially the measure of a state’s ability to pay off its debt, or roll over its debts as they mature, in a relative fashion. However, the United States’ public debt spirals faster out of control, forcing a conscious reassessment by the American public. In reality, it’s one mega confidence game. Luckily for now, the U.S. can keep doing this, other countries cannot.

Crowded Infrastructure

As pensions increase allocation to real assets, the developed infrastructure space becomes crowded. Many prominent Canadian pension giants like Canada Pension Plan Investment Board (CPPIB) and AIMCo have left the table, as intense competition for assets have driven up valuations for illiquid assets. Some public investors like AIMCo have started selling off infrastructure holdings, like its investment in Chile, the Autopista Central de Chile, a Santiago-based toll road infrastructure asset.

Emerging Markets

Emerging markets remain mired in tenebrific trenches. These headwinds are affecting companies like Dutch-listed ArcelorMittal, the world’s biggest steelmaker. Over the course of 2015, the price of iron ore fell by over 40%. What’s worse? ArcelorMittal’s 2015 loss of nearly US$ 8 billion was four times as much compared to 2014. Fund managers such as Aberdeen Asset Management, being singled out by the financial press, was plagued by withdrawals from large clients such as sovereign funds. To be fair, other asset managers suffered outflows. Franklin Resources Inc. stated that investors emptied out US$ 20.6 billion in the fourth quarter. Emerging market specialist managers are refocusing which markets they want to focus their efforts on. Ultra low or negative interest rates, increasing debt loads by governments, emerging market turmoil and excessive demand for illiquid assets are factors to watch for in 2016.

This article is written by Michael Maduell and his opinions are his own and not officially of the Sovereign Wealth Fund Institute.

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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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