SWFs
-
Global Overview
FLAR Legal Seminar
August 29
-
39, 2013
Why sovereign wealth management?
Revenues from extractive industries
Fiscal smoothing of expenditures
Permanent wealth/inter
-
generational equity
Funding of future pension
obligations
Reserves accumulation from balance of payments
surpluses
Non
-
commodity funds
Source: Sovereign Wealth Fund institute 2011
1/ Central Banking Publications
•
Cumulative
f
iscal or balance of payments surpluses
fund US
$2.1
trillion in long term
investment funds for investment income and to meet future pension liabilities
0
100
200
300
400
500
600
China -SAFE Investment Company
China Investment Corporation
Hong Kong Monetary Authority Investment Portfolio
Government of Singapore Investment Corporation
Canada-Caisse de Depot et Plecement du Quebec
Singapore- Tamasek Holdings
Canada- CPP Investment Board
China- National Security Fund
Australia-Future Fund
Korean Investment Corporation
Kazakhstan National Bank 1/
Malaysia- Khazanah Nasional
Ireland - National Pension Reserve Fund 1/
France- Strategic Investment Fund 1/
New Zealand Superannuation Fund
Brazil - Sovereign Fund of Brazil 1/
China-Africa Development fund
US$ Billions
Commodity funds (oil and gas)
0
100
200
300
400
500
600
700
Abu Dhabi Investment Authority
Norway- Government Pension Fund
Saudi Arabia- SAMA Foreign Holdings
Kuwait Investment Authority
Russia- National Welfare Funds
Quatar Investment Authority
Lybian Investment Authority
Algeria - Revenue Regulation Fund 1/
UAE-International Petroleum Investment Company
Alaska Permanent Fund
Kasakhstan National Fund 1/
Brunei Investment Agency 1/
State Oil Fund of the Republic of Azerbaiiyan
Iran- National Development fund
Chile- Social and Economic Stabilization Fund 1/
Investment Corporation of Dubai
Alberta's Heritage Savings Trust Fund
Bahrain - Mumtalakat Holding Company 1/
Oman-State General Reserve Fund
Botswana-Pula Fund 1/
Timor-Leste Petroleum Fund
Saudi Arabia - Public Investment fund 1/
Permanent Wyoming Mineral Trust Fund 1/
Trinidad & Tobago -Heritage and Stabilization Fund 1/
Source: Sovereign Wealth Fund institute 2011
1/ Central Banking Publications
•
Revenues from extractive industries fund
US$2.7
trillion
US$ Billions
Commodity Funds
Objectives
Fiscal stabilization
Protect
tradeable
sector from currency appreciation
Support current spending while investing long term for
intergenerational equity
Two types of funds
Integrated fund that both supports current fiscal spending and
invests long term for capital preservation and intergenerational
equity
Earmarked funds
Stabilization fund for to smooth fiscal spending
National pension fund to cover future pension liabilities
Future funds (unpopular)
Commodity Fund
-
Integrated
All commodity
revenues
Fund
Budget
•
Funds structural budget deficit
•
Guidelines on withdrawals to preserve capital
over time
Norway
Abu Dhabi
Saudi Arabia
Kazakhstan
Azerbaijan
Alberta
Timor
-
Leste
Botswana
Stabilization fund
-
earmarked
Commodity
revenues
Fund
Budget
Government establishes a threshold price level based on the expected long term average
When the current prices exceeds the long term threshold price, “excess” revenues are
paid into the Fund and can be drawn down during periods of below normal prices.
Chile
Mongolia
Russia
Pension fund
-
earmarked
National pension funds funded by contributions (plan) or by
fiscal surpluses to meet future government pension
obligations and invested in overseas assets
New Zealand Superannuation Fund
Australia Future Fund
Chile Pension Reserve Fund
Russia National Welfare Fund
SWF Governance
Fiduciary
-
beneficiary relationship
Government as “sponsor”
Enabling legislation
Investment policy
Investment process
Transparency and reporting
Oversight
Statutory regulations and standards of care
SWF Institutional
A
rrangements
Legislative
Body
Ministry
Govt
Auditor
Executive Board
Supervisory council/external auditor
Asset Manager
Risk, Control &Compliance
Regulation &
delegation of
authority
Risk and
performance
reporting
Norway
’
s Government Pension Fund Global
11
Authorizing legislation
Government Pension Fund Act 2005
Ministry of Finance
Management mandate and Ethical
Guidelines
Norges Bank Executive Board
Investment mandate and selection of CEO
Global
Custodian
Council of
Ethics
Internal
Managers
External
Managers
Auditor General
Governance
Committee
CEO
Norges Bank Investment Management
Implementation of Investment Policy
New Zealand Superannuation Fund
12
CEO
New Zealand Superannuation Fund
Implements Investment policy
Global Custodian
Equity Managers
Alternative
Managers
Fixed income
Managers
New Zealand Superannuation
and Retirement Income Act 2001
Ministry of Finance
Appoints Board and sets strategic
investment objectives
General Audit
Board of Guardians
Sets Investment Policy, responsible investment guidelines, budget
and appoints CEO
Asset manager can be dedicated
government agency or central bank
Most governments have set up a dedicated government
investment agency with its own governance, pay scale and
specialized skill set
Central bank as asset manager:
Norway whereby the investment management corporation was
embedded within the central bank
Emerging market countries with little international investment
infrastructure (East Timor, Botswana, Trinidad &Tobago)
Stabilization funds that are invested in low risk strategies similar
to investment of foreign currency reserves (Chile, Peru, Mexico)
Policy alternatives to a sovereign
wealth fund
Domestic investment in state owned enterprises,
development banks and jobs creation (not a good record
but back in vogue)
Public investment in infrastructure
Direct dividend to citizens (or reduction in taxes) to foster
private savings and investment
National asset/liability management
—
foreign direct
investment in
“
deficit
”
sectors; eg Chinese acquisition of
commodity producers and agricultural land
Sovereign
Fund Investment Strategies
Official
Reserves/
Central Bank
•
External assets for
directly financing
international
payment
imbalances
•
Highly liquid,
often OECD
government
bonds
Stabilization
Funds
•
Funds to insulate
budget &
economy from
excess volatility,
inflation, Dutch
disease, & other
macro economic
threats
•
Low
-
risk, liquid
assets: cash,
government
bonds
Pension Funds
•
Investment
vehicles to meet
government
’
s
future pension
obligations
•
Funded and
denominated in
local currency
Sovereign
Wealth Funds
•
Investment
vehicles by
foreign exchange
assets
•
Managed
separately from
official reserves
•
Typically have a
higher tolerance
for risk
State Owned
Enterprises
•
Companies in
which the state
has significant
control
•
May make
investments in
foreign assets
Increasing
investment
h
orizon and investment
r
isk
Source:
Monitor 2010 SWF Report
SWF Strategic Asset Allocation
Australia
Future Fund
Norway Global
Singapore GIC
ADIA
Alaska
New Zealand
Peru Stab
Trinidad
Chile Stab
Expected return
Risk
Equities
Fixed income
Alternatives
Chile
Pension
SAA is main driver of wealth generation and investment
income
17
Source: World Bank Treasury calculations based on data from Ibbotson Associates and Bloomberg
Balanced equity/bond
vs
government bond/cash portfolio (
1979
–
2011)
Typical Central Bank Portfolio: 100% US Government Bonds between 1
-
3yr ;
Diversified Portfolio: 40% Developed Global Stocks/10% EM Stocks/5% EM Debt/5% Commodities/20% US Treasuries/20% US Corporat
e B
onds
Source: World Bank Treasury calculations based on data from Ibbotson Associates and Bloomberg
-20%
-10%
0%
10%
20%
30%
40%
0
5
10
15
20
25
30
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Return on a typical Central Bank Portfolio
Return on a diversified Portfolio
Cumulative Return on a typical Central Bank portfolio
Cumulative Return on a Diversified Portfolio
Annual Return
Cumulative Wealth
Diversification and modern capital
markets theory
But divide your investments among many places,
for
you do not know what risks might lie ahead
.
Bible, Ecclesiastes, 935 BC
A portfolio of uncorrelated investments has a lower risk than
any single investment
Harry Markowitz, Modern Portfolio Theory, 1957
Modern paradigm of the prudent person rule
“Prudence is to be found principally in the process by which investment
strategies are developed, adopted, implemented, and monitored in light of
the purposes for which funds are held, invested, and deployed. Prudence
is demonstrated by the process through which risk is managed, rather
than by the definition of specific risks that are imprudent. Under a
modern paradigm, no investment is imprudent per se. The products and
techniques of investment are essentially neutral. It is the way in which
they are used, and how decisions as to their use are made, that should be
examined to determine whether the prudence standard has been met.
Even the most aggressive and unconventional investment should meet
that standard if arrived at through a sound process, while the most
conservative and traditional one may not measure up if a sound process is
lacking.
”
Longstreth
, B. “Modern Investment Management Theory and the Prudent Person Rule”,1986
Investment strategy by statute or
regulation
Blunt tool that may dictate
A
llowable asset classes
Minimum rating for allowable investments
Maximum exposure to a sector or investment (diversification
by regulation)
Portfolio diversification
is
required
to meet long term risk
-
adjusted return
targets
21
Real Estate
Developed
Equities
Commodities
Cash
US Corporate
Bonds
US Govt. Bonds
Developed
Equities
Commodities
Cash
US Corporate
Bonds
US Govt. Bonds
US High Yield
Bonds
Developed
Equities
Commodities
Cash
US Corporate
Bonds
US Govt. Bonds
US High Yield
Bonds
EM Debt
EM Equities
Developed
Equities
Commodities
Cash
US Corporate
Bonds
US Govt. Bonds
US High Yield
Bonds
EM Debt
Developed
Equities
Commodities
Cash
US Corporate
Bonds
US Govt. Bonds
US High Yield
Bonds
EM Debt
Real Estate
Real Estate
Real Estate
EM Equities
EM Equities
Real Estate
Highest
return
Lowest
return
1976
-
1983
1983
-
1990
1990
-
1997
1997
-
2004
2004
-
2011
Source: World Bank Treasury calculations based on data from Bloomberg
World Bank Treasury estimates
How does the legal environment impact
the SAA?
Australia
Future Fund
Norway Global
Singapore GIC
ADIA
Alaska
New Zealand
Peru Stab
Trinidad
Chile Stab
Expected return
Risk
Equities
Fixed income
Alternatives
East Timor
Azerbaijan
Chile
Pension
Threat of liability and impact on portfolio
management
Contemporary application of the prudent person rule (NZ, Alberta,
Alaska, Australia)
Focus on investment process
Role of diversification
Standards of behavior
Statutory regulation of allowable investments
Bright line that provides more protection and less scope for interpretation
Asset allocation by parliament as “fiduciary” rather than by investment
manager (Norway)
Where the government is risk adverse or unprepared, can lead to highly
sub
-
optimal portfolios (East Timor, Russia, Azerbaijan)
Combination
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