Sovereign Wealth Funds

See also Oil & power

Norway’s pension fund
Passive aggressive – A row over the world’s second-largest sovereign fund revives an old debate
The Norwegian Government Pension Fund Global, which is more commonly known as Norway’s petroleum fund, looks after some 2.6 trillion Norwegian krone ($444 billion) in savings from royalties on the country’s oil and gas reserves in the North Sea. The fund, which Norway is saving for a rainy day, is already about the size of the national economy and will probably double within about a decade.
For most of the past ten years it has hummed along happily. As Europe’s largest shareholder it has taken its ownership responsibility to heart with typical Nordic earnestness. It regularly writes letters to companies urging them to improve their corporate governance. It also blacklists firms that it thinks are not well-behaved. Among them are tobacco companies and arms producers.
In the years before the crisis, making the world a nicer place was not at odds with making money. The fund comfortably beat the investment benchmarks set for it by Norway’s government. But that all came to a crashing halt in 2008, when the fund’s value slumped by almost a quarter; its equity holdings dropped by around 40%.
Guy Stanley asks: What seems to be missing from the story is whatever happened to dividends. Value investment allegedly outperforms random walks because of the accumulated reinvested dividends.
Tony Deutsch comments:Those who argue that managed funds have nothing to offer but extra costs over index funds have the record on their side in case of the Norwegian Fund. That is one observation. There are many other observations, which are worth looking into, provided you accept the notion that able/hard working/lucky managers are at least sometimes able to put together portfolios that beat the portfolio put together by the committees that create the indexes. The more consistent the ability of the manager to beat his index, the less likely is that he is just lucky.(The probability of “lucky” never falls to zero.) The trick is to find the manager(s) you want.
The argument cited in the article, that some investments are less liquid, or are inherently perceived to be more risky, thus premium returns earned that way resulting in beating the chosen index (there is a plethora of possibilities) do not count. The reality is that if they invest in a manner fundamentally different from their index, they picked the wrong index for a yardstick.
Using an index to measure investment manager performance is relatively new. Before that, we defined mandates broadly (say no more than forty issues of Canadian Equity listed on the TSE) and waited for the results. For mere money, organizations were born that surveyed the result, and compared performances. Every investor wanted his manager in the top quartile, but most could not be. That forced managers to compete with each other in a tough Darwinian market.
The industry rushed to its own rescue. They did not want to compete with each other, they wanted to be compared to an index. Running money became a matter of deviating from the index by underweighting (relative to the index) those issues contained in the index that did not look so good, and overweighting the more promising ones. Once the performance of the index was beaten, the manager has met his obligation and was kept on, even if his outperformance was less than that of his competitors. Investors pay for active management, and get very little active management in return. Any short-term performance measurement usually has most managers producing worse than the index. For that reason, I would rather invest in an index, than with a randomly picked manager.
It takes real courage to run a maverick portfolio.(There are some.) Excess performance is appreciated but not rewarded on the upside, and heavily penalized by loss of business on the downside.
21 March 2008
Are sovereign funds a threat?
The Bush administration somehow extracted promises from the governments of Singapore and Abu Dhabi (one of the United Arab Emirates) that they would not use their multi-billion-dollar investments in American companies for so-called “geopolitical goals.” So no, Abu Dhabi will not be trying to make Citigroup collapse in order to bring the American economy to its knees. But did you ever think they would?
I think what’s going on is more politics than economics. Washington is trying to send two signals. First, they want to tell the public that they’re being vigilant, making sure those pesky foreigners don’t take control of the American economy. Second, Washington wants to tell other, perhaps less friendly governments that it’s keeping an eye on their investments – and that Washington might someday try to secure similar promises from them, too. Is it worthwhile? It probably doesn’t hurt, but, then again, investment protectionism can be a slippery slope.
(IHT) Sovereign funds agree to avoid ‘geopolitical goals’ in U.S. investments
Singapore and Abu Dhabi make commitment
February 28, 2008
Suspicion lingers
(The Economist Intelligence Unit) The West lacks enthusiasm for Arab sovereign-wealth funds
Rumours that the Qatar Investment Authority (QIA) may be thinking of buying a stake in Royal Bank of Scotland (RBS) pushed up the share price of the Edinburgh-based bank by 5% on the London Stock Exchange on February 25th, reflecting the intense interest accompanying any move or potential move by Gulf Arab sovereign wealth funds (SWF). QIA had already attracted notice earlier in the month with its acquisition of 1-2% of Credit Suisse, as part of a purported drive to build up a US$15bn portfolio of Western bank assets (a deal that was somewhat tarnished by the Swiss bank’s subsequent disclosure of a hefty US$2.8bn loss arising from trading errors).
Shortly after the Credit Suisse deal, the European Commission (EC) approved proposals for SWFs to be requested to adopt a voluntary code of conduct requiring certain standards of corporate governance and disclosure. The EC president Jose Manuel Barroso has been open about the political dimension. “We cannot allow non-European funds to be used as an implement of geopolitical strategy,” he said on February 24th.
The IMF, for its part, has emphasised the risks to the global economy of increased financial flows through “black boxes”, as the Fund’s chief economist, Simon Johnson.
The irony is that banks in both Europe and the US have not just welcomed but actively solicited investment from the likes of the Kuwait Investment Authority (KIA) and the Abu Dhabi Investment Authority (ADIA)—the world’s biggest SWF with assets estimated at some US$800bn. And in straitened times, politicians too have encouraged such moves by the funds that, buoyed in the Gulf Arab case by record oil revenues, have the ready cash currently so lacking during the Western credit crunch. However, the gathering storm of objections in the West – sometimes quite blatantly born of suspicion of the Arab world – to investment by Gulf Arab SWFs is prompting both the older and younger funds to rebalance holdings geographically, primarily towards the booming economies of southern Asia.
This does not mean that the SWFs are about to shun investment in their traditional hunting grounds in Europe and the US—as QIA’s recent moves demonstrate. Moreover, Gulf investors, both government and private, admit that they will need time to understand the inner workings of the principal Asian markets. However, Western governments and regulatory authorities will need to weigh carefully their concerns about the impact of the SWFs against the risks of forfeiting the benefits that their infusions of capital can bring. Complete article